THE FOLLOWING ITEMS WERE THE SUBJECT OF
               A FORM 12B-25 AND ARE INCLUDED HEREIN: ALL ITEMS.

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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


                     FOR THE FISCAL YEAR ENDED JUNE 30, 1996

                                       OR

             |_| 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                            41-176721
       (State or other jurisdiction of             (I.R.S. Employer
       incorporation or organization)             Identification No.)

                              7400 METRO BOULEVARD
                              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. |_|

The Company's revenues for its most recent fiscal year were $1,625,720.

On October 1, 1996, the Company had 4,751,015 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 $15,069,471.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

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


                                     PART I


           This Form 10-KSB contains certain forward-looking statements. For
this purpose, any statements contained in this Form 10-KSB that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate" or "continue" or the negative or other
variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those set forth in the section below entitled
"Certain Important Factors."

ITEM 1.     DESCRIPTION OF BUSINESS

           (a)   BUSINESS DEVELOPMENT

           RSI Systems, Inc. (the "Company" or "RSI") designs, develops and
markets telecommunications products for video conferencing, collaborative
computing and high-speed data transfer. The Company's first product, the
ERIS(TM) Visual Communications System (the "Eris System"), consisting of a
peripheral device and application software, enables personal computer users to
engage in "desktop conferencing" -- the ability of two PC users to conduct a
video conference and simultaneously view and work on documents such as
spreadsheets, diagrams or reports ("document collaboration") and transfer
computer files from one user to the other.

           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 $.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, has commenced development of new products and product enhancements and
expanded the Company's sales and marketing activities. In September 1996, the
Company completed a private placement of 1,500,000 shares of Common Stock,
resulting in net proceeds to the Company of approximately $4,005,000.00.

           During fiscal 1996 and early fiscal 1997, the Company refocused its
product development, marketing and distribution strategies, and is in the
process of altering its manufacturing processes to allow it to leverage the
feedback it has received from its customers to enable the Company to develop and
distribute products more quickly and cost-effectively. The Company has also made
certain changes to its management team.

           (b)   BUSINESS OF THE COMPANY

                PRODUCTS

           The Company's first product, the Eris System, consists of a
peripheral device and application software. The Eris System is a self-contained,
"plug and play" peripheral with an integrated, full duplex speakerphone,
requiring only a personal computer and a video camera to be fully operable. The
Eris System can be used with either Macintosh or Windows-based computers.

           The list price of the Eris System is $3,995, which includes the Eris
peripheral, either Macintosh or Windows application software, a user manual and
cabling. Customers may use their own videocamera or purchase a videocamera from
the Company. The Company offers for sale videocameras from various suppliers
which connect with the Eris Systems. The principal suppliers for these
videocamera peripherals are Sony, Canon and Video Lab.

           The Company believes that the Eris System is easier to install than
most desktop conferencing systems on the market today because, unlike desktop
conferencing systems manufactured by others which are "embedded" in the host
computer, the Eris Systems is a peripheral device. Also, as a peripheral device,
the Eris System can be moved between different computers and can be easily
transported. Finally, users do not need the newest computer model to effectively
use the system because the processing power is located in the peripheral. The
Eris System is connected to the host computer by an industry standard SCSI or
PCMCIA port -- high speed data ports also used to connect external hard disks
and other devices.

           The Eris System allows users to share any window from any application
or share the complete contents of the monitor which may contain many windows.
Users can collaborate on documents in real time while continuing to converse. If
both users have an Eris System, the sender of a document can edit the shared
document while the other party to the conference may highlight portions of that
document for discussion purposes. In addition to document collaboration, files
can be transferred during video and audio conversations. If only one user to the
conference has an Eris System, however, document sharing and collaboration is
not possible due to the lack of international standards for data communications.

           The Eris System peripheral is equipped to provide users with a number
of options depending on their specific requirements. The Eris System can be
easily configured with external monitors, microphones and speakers to compete
directly with larger and more expensive rollabout systems. Also, to record both
video and audio, a VCR can be connected to the "video out" port to record the
video conference. Finally, a standard POTS (plain old telephone service) jack
enables the user to attach a telephone to carry on a more private conversation.

           The Eris System can communicate with any other standards-based video
conferencing system which is compatible with the standards that the Eris System
meets. The system supports both NTSC (United States) and PAL (international)
video standards. In addition, the Eris System meets the H.320 standards
developed by the International Telecommunications Union ("ITU"), a United
Nations standards organization, for video and audio communications and fully
conforms to all Integrated Services Digital Network ("ISDN") BRI protocols. The
Eris System also supports international ISDN networks and ISDN switch types,
including EuroISDN in Europe, NTT in Japan and ISDN systems in Australia.

PRODUCT DEVELOPMENT

           The Company has continued its product development efforts during the
last fiscal year. The Company currently believes that new segments of the video
conferencing market are emerging which will be more receptive to the Company's
technology. Originally the Company believed that the marketplace was segmented
into medium and large permanently installed department systems, and desktop
computer-based systems. The Company now believes that the marketplace is
shifting to the following segmentation: (a) large permanently installed room
systems; (b) medium to large permanently installed department systems; (c) small
or medium sized MOBILE workgroup systems; and (d) private office computer-free
and computer-based systems. The Company is focusing its efforts on the small or
medium sized mobile workgroup systems and the private office computer-free and
computer-based systems.

           In September 1996, the Company announced its new COMPUTER-FREE(TM)
ROLL-AROUND 1000 system (previously developed under the name WGS2000 Workgroup
Rollaround System). This roll-about system package comes complete with all the
devices necessary to provide immediate high-quality ISDN-based video
conferencing without the need for a personal computer. A computer can be
integrated with the system, however, to provide additional functionality if
desired. The Eris ROLL-AROUND 1000 carries a list price of $10,995, which
includes a sturdy, locking rolling cabinet/stand; the Eris computer-free
peripheral; a 20-inch Sony color TV/monitor; a Canon VCC-1 pan/tilt and zoom
color camera; the US Robotic conference room speaker microphone controller;
cabling; and an instruction manual. The computer-free Eris ROLL-AROUND 1000
system does not require the addition of a Macintosh or personal computer for
operation. This dramatically simplifies the use of the system as well as
lowering the initial equipment costs. The portability allows organizations to
bring video conferencing to the point of need.

           To address the private office opportunity, the Company has extended
its computer-free strategy to include the standalone credenza/desktop system
called the ERIS/PROFESSIONAL 1000, which was as also released in September 1996.
This system is targeted at workers, managers, and executives who wish to have a
simple, high-quality, competitively priced video conferencing system available
for immediate access. The system connects directly to a color TV/monitor and is
controlled by a simple touch-tone telephone handset. The unique ERIS
computer-free software does not require the user to have any knowledge of
computers or computer skills for operation. One can achieve rapid video
conferencing merely by pushing a button and following the prompts on the screen.
The list price for this system is $7,495, which includes the ERIS computer-free
system peripheral; software; a 9-inch Sony TV/monitor; a stand; a Sony camera;
touch-tone telephone handset; cabling; and an instruction manual. A personal
computer or Macintosh can be added to the system to provide additional
functionality.

           Also announced in September 1996 was the third computer-free product:
the ERIS/PORTABLE 1000 (previously developed under the name WGS2000 Portable
Workgroup System). It extends the computer-free theme and is targeted at hotels,
conference centers and larger organizations that are looking to keep control of
the video conferencing components. The system's list price is $7,495, which
includes the ERIS computer-free system peripheral; software; a TV/monitor;
a Sony camera; microphone; handset controller; cabling; an instruction manual
and a locking case. The locking case allows for the system to be preset-up,
cabled and ready for use. This system can be carried or placed on a cart and
rolled to a conference room or site for use. The group or organization will have
access to computer-free video conferencing merely by removing the top and
plugging the system into an ISDN line. A personal computer or Macintosh can be
added to the system to provide additional functionality.

                  Each of the foregoing products has at its core the existing
Eris System hardware. The Company is also developing its next version of
hardware which will be the core of a new family of video conferencing products,
the "Champion" products. The Champion products will feature a more integrated
compression/decompression ("codec") chip set, more flexible telephone network
interconnection capabilities, increasing wide area connection potential, up to
384 Kbps capability, enhanced audio support, higher resolution and quality video
output, data transfer capability within the unit and infrared remote control
capability. The Company intends to launch the new Champion product family in
late October 1996 at the Telecon convention in Anaheim, California. The Company
intends to commence commercial sales of Champion products in early 1997.

           The ITU is currently in the process of establishing standards
(generally referred to as the T.120 standards) which will enable manufacturers
to offer standards-based video conferencing systems capable of conducting
document collaboration and file transfer with other standards-based video
conferencing systems. The first generation of the T.120 standards have been
promulgated and the Company is currently working with another entity to develop
software for the Eris System that incorporates the first generation of the T.120
standards. The development of this software began in May 1996 and is expected to
be completed in the fourth quarter of calendar 1996.

                  In July and August 1995 the Company abandoned its intention to
develop and market a version of the Eris System that would permit desk-top
conferencing over POTS lines due to re-evaluation of the effects on the market
of the release of ITU Standard HDOT 324.

           The Company has delayed the development of an enhanced version of its
software which will allow users to video conference with multiple remote users
of standards-based systems via AT&T's Worldworx(TM) service for multipoint video
conferencing. The Company's software has been enhanced, however, to work with
many other multipoint video conferencing service providers.

           During the fiscal years ended June 30, 1996 and June 30, 1995, the
Company's expenditures for research and development were $1,540,416 and
$1,383,365, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation."

SALES AND DISTRIBUTION

           The Company has recently altered the focus of its distribution
strategy for its existing ERIS and new Champion products. This strategy will
incorporate a four-tiered distribution approach.

           The first tier of the Company's distribution strategy is direct
sales. Until recently the Company did not enter into any type of direct selling
activities for the Eris product, which meant that all sales were funneled
through independent dealers and distributors. The Company is now entering into
direct sales relationships with selected regional and national accounts because
of the simplicity, ease of operation, and proven reliability of the Eris
product. This approach is providing the Company with a number of benefits,
including a decrease in extended larger system sale cycles, and the opportunity
to test first-hand responsiveness of clients to the product and new potential
features and capability requests. As the other tiers of the Company's
distribution strategy mature, the Company will move away from the direct selling
strategy to reduce its sales expense.

           The second tier of the Company's distribution strategy is targeted at
consultants and system integrators. These two groups offer significant
opportunity to the Company in the long-term by providing access into medium to
larger organizations which may have a need for video conferencing. General and
market specific consultants are being targeted and provided with information and
education on video conferencing and the Company's systems. Compensation will be
offered to these individuals if they provide leads for follow-up by direct
sales, make recommendations or remarket the product.

           There are principally two types of system integrators: computer
network integrators and telecommunication network integrators. Both of these
types of integrators are being targeted by the Company to resell products to
integrate into existing networks. Since many integrators already have a strong
user base in place, the Company believes that they will be receptive to
providing both a computer-based and computer-free self-contained peripheral,
such as Eris, to increase their revenue while providing functionality to their
customer/users.

           The third tier is the value-added reseller or dealer. Throughout
North America hundreds of these types of dealers currently exist, providing
computers, video conferencing systems, audiovisual equipment and selected office
automation systems into various geographic markets. These dealers typically sell
within an area which they can cover with same day service and support. Some of
these dealers are generalists, selling to all types of organizations, while
others are specialists, targeting only specific marketplaces such as law,
accounting or education. The Company currently has relationships with 33 dealers
who market the Company's products throughout North America. The Company intends
to expand this dealer network to a minimum of 50 by its third quarter of fiscal
year 1997.

           The fourth and final tier of distribution for the Company is
international. Currently, the Asian marketplace for video conferencing is
rapidly expanding. Because of the costs related to travel throughout the Pacific
Rim, it is realistic for organizations of all sizes to look for more economical
methods to communicate. Video conferencing has become such a method. RSI has
established 10 master distribution/dealers throughout the Pacific Rim, and will
have in place substantive distribution in all Asian countries by the end of the
second quarter of fiscal 1997. It is anticipated that this distribution as well
as the unique capabilities of its computer-based and computer-free systems will
allow for significant sales opportunity in the international marketplace.

           Effective September 20, 1996, the Company entered into an exclusive
distribution relationship with Canon Trading USA ("Canon"), pursuant to which
Canon will act as a distributor for the Company in Japan for a period of three
years, subject to earlier termination under certain circumstances. Under the
agreement, Canon will purchase the Company's Eris video conferencing system to
create a Japanese version of the Eris computer-based system to sell through its
sales force. Canon is reportedly the largest reseller of Macintosh systems in
the world, and the Eris System provides it with a video conferencing peripheral
to attach directly to an Apple Macintosh. Canon also resells a significant
amount of Windows-based personal computers, and the Eris system, being
cross-platform, can also be attached directly to a PC. The Company has also
granted Canon a non-exclusive world-wide license to use and copy the Company's
product documentation, its software/firmware and the service software.

           The Company is currently reestablishing its European distribution
operation in a more cost effective manner. The operation will mirror the
approach used by the Company in Asia. RSI has already established 13
distributors in Europe. The Company will continue to expand its new master
distributor strategy to select a primary distributor for each European country.
The Company appointed a director of European sales in October 1996, who will be
directly responsible for developing the master distributors and their efforts to
create sub-distributors and, ultimately, sell product in their countries.


COMPETITION

           The desktop conferencing equipment market is highly competitive and
the Company believes that competition will intensify as more organizations with
significant telecommunications capabilities enter the marketplace. Many of the
Company's competitors have greater financial, technical, marketing and sales
resources than the Company, including AT&T Corporation, PictureTel Corporation,
Apple Computer, Inc. and Intel Corporation, all offering computer-based
teleconferencing systems. The Company believes, however, that the Company's Eris
peripheral strategy still remains unique in the marketplace and its
cross-platform flexibility and simplicity of attachment provide competitive
advantages.

           There are fewer competitors in the computer-free teleconferencing
market. The Company has chosen to target this as an area of growth in part
because there are currently fewer competitors. In this market segment,
simplicity, quality of image and return on investment are driving the purchase
decision rather than computer functionality. The Company's new family of
computer-free systems offers a significant sales opportunity for RSI.
Competition is currently limited to Tanberg Industrier AS ("Tanberg"). Tanberg's
system does not require a computer and has a different configuration than the
Eris System. The Company believes that over time there will be more computerless
types of systems being announced into the marketplace as manufacturers become
aware of the sales potential.

           The Company also faces competition from manufacturers and developers
of "roll-about" video conferencing systems, such as PictureTel Corporation, Vtel
Corp., British Telecom, NEC and Compression Labs, Incorporated. RSI, however,
believes that it will continue to remain a viable competitive option to the
other manufacturers because the Company offers both computer-based and
computer-free roll-about capability at generally lower price points.

           The Company intends to compete based upon product quality,
functionality and return on investment. With its computer-based systems it will
focus primarily on functionality and simplicity of integration to both PC and
Mac-based systems. For its computer-free systems, the Company will focus
onsimplicity of operation, quality of image and return on investment.


MANUFACTURING

           Currently, the Eris System is being manufactured under contract by
Lucent Technologies (formerly AT&T) Custom Manufacturing Services ("Lucent").
Lucent provides substantially all parts, purchasing and materials inventory,
manufactures and tests the product for the Company and also ships products to
the Company's customers directly from its production facility. Although raw
materials purchasing services are provided by Lucent, alternate suppliers have
been identified by the Company for most components. Major components for which
the Company depends on a single source include the AT&T AVP(TM) compression chip
set manufactured by AT&T Microelectronics and two programmable logic cell array
integrated circuits manufactured by Xilinx Corporation. If these components
become unavailable to the Company, the Company would experience serious delays
to redesign the Eris Systems to accommodate similar components from other
vendors. The Company does not have a contract with Xilinx Corporation. Lucent
purchases the circuits used in the Eris System directly from Xilinx Corporation.

           Lucent has agreed to warrant to end-users and the Company that all
products are free from defects in material and workmanship for one year and also
warrants to the Company that all products conform to the Company's written
specifications.

           Lucent has agreed to provide the Company with an additional 690 units
under the agreement, after which the Company's agreement with Lucent will
terminate. Through October 1996, 228 of these units have been delivered to the
Company. The Company believes that the remaining 462 units will be delivered to
RSI by the end of 1996.

           On September 10, 1996 a new manufacturing agreement was finalized
between the Company and Altron, Inc. for the manufacture of the Eris video
conferencing unit. This manufacturer will provide 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 packaging slip
date if Altron ships to the Company, or for twelve (12) months from the date the
Company ships to the customer, whichever comes first.

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

INTELLECTUAL PROPERTY; ROYALTY AGREEMENTS

           The Company's success is dependent in part on its proprietary
information, technology and know-how. 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 is in the process of amending 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 is unable to predict which utility claims for
its Eris System patent application will be allowed, if any, whether a utility
patent will be issued or, if a utility patent is issued for the Eris System, how
long such process will take. The Company also applied for various foreign
patents relating to the 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 in Australia on July 1, 1996, Germany on January 2, 1996,
and Great Britain on January 26, 1996. The Company was also issued a certificate
of registration for the "Eris" trademark in France on August 13, 1996, but the
owner of the "Iris" trademark has challenged the Company's "Eris" trademark.
This matter is still pending and no further action has been taken. The Company
also has applications to register the "Eris" trademark pending in Canada, Italy,
and Japan.

           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 which is part of the Eris System carries a standard
license agreement for the end user. The software license agreement is included
in the Eris manual and grants the purchaser a non-exclusive and non-transferable
license to use the software program which is part of the Eris System.

           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 stand
alone 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 are
anticipated to begin in fiscal year 1997.

           On March 8, 1996 the Company entered into an agreement with Future
Labs, Inc. to license a computer software program from Future Labs known as
TALKSHOW, which is a multipoint version of the TALKSHOW document conferencing
software program. Pursuant to the agreement, Future Labs granted the Company a
non-transferable, non-exclusive license to distribute TALKSHOW in connection
with the sale of the Company's line of Windows and Macintosh application
software, provided that the Company makes no separate or additional charges for
TALKSHOW. The Company agreed to include a copy of TALKSHOW with each shipment of
its Window and Macintosh application software, and to pay Future Labs a royalty
for each copy of TALKSHOW that the Company duplicates and distributes. The
amount of the royalty fee is based on the volume of systems sold by the Company,
with the fee ranging from $62 (1 to 2,000 systems sold) to $12 (over 20,000
systems sold). The agreement provides for a first year minimum royalty
commitment of $100,000. Sales of the Eris Systems containing the software per
this royalty agreement are anticipated to begin in fiscal year 1997.

           The Company also pays royalties to certain organizations as a result
of their respective contributions to the development of the Eris System. Worrell
Design Inc., Eden Prairie, Minnesota, performed industrial design services for
the Company and receives a 1-1/2% royalty of the net payments to the Company up
to 5,000 systems, 1% for the next 5,000 systems and 1/2% for the following 5,000
systems. Pursuant to a license agreement with Link Technology Inc., Holland,
Pennsylvania, which provided certain ISDN software used in Eris System, 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.

APPROVALS AND CERTIFICATIONS

           Government and telephone carrier approvals, as well as safety
certifications, are a key requirement for electronic systems that use the
telephone network. In the United States, the Eris System has been certified by
the FCC as a Class A (Business) device. The Company has received certification
from Underwriters Laboratories Inc. ("UL") that the Eris System complies with
the applicable requirements for U.S. and Canadian Listing. The Company has also
received telephone and safety certifications for its Eris System in the
following countries: Australia, New Zealand, the European Union, Japan, Taiwan,
Hong Kong, Singapore and Malaysia. Because each of the Roll-Around 1000, the
Portable 1000 and the Professional 1000 have at their core the Eris System
hardware, new certifications and approvals are not needed before these products
are sold.

           Before introduction of the Champion products, the Company will need
to undergo a similar certification process. The Company believes that such
certifications and approvals will take approximately two to six months. Although
the Company has obtained FCC Class A certification and other approvals for its
Eris System, the Company cannot predict whether it will obtain necessary
approvals and certifications for future products or whether applicable law or
regulations might change in a way adverse to the Company's ability to sell its
products in a particular country.

EMPLOYEES

         At October 1, 1996, the Company had 21 full-time employees, of whom 6
were employed in sales, marketing and customer support, 9 in product development
and 6 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,
include the following, as well as those listed in the "Risk Factors" section of
the Company's Registration Statement on Form SB-2 (File No. 33-93240C):

           (1) The history of operating losses experienced by the Company since
its inception and the expectation that the Company will continue to incur
additional operating losses and net losses over the next year.

           (2) The ability of the Company to achieve market acceptance of the
computer-based Eris systems, the computer-free Eris systems, i.e., PROFESSIONAL
1000, PORTABLE 1000, and ROLL-AROUND 1000, and when fully developed, the new
Champion family of products.

           (3) The impact of competition at the workgroup, office, desktop, both
PC and computer-free market segments, 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. This lease expires May
31, 1998. Rent payments under the lease for fiscal year ending June 30, 1996
were approximately $73,000. The Company believes its current space is sufficient
for its current and anticipated needs. The Company also leases office space in
California pursuant to a lease which expires October 22, 1996. The Company paid
approximately $3,000 in fiscal year 1996 to rent this space. The Company also
spent $10,000 in fiscal year 1996 to lease office space in Australia. This lease
expired on February 13, 1996, but the Company continued to rent space through
June 1996 on a month-to-month basis. Finally, the Company paid $12,222 in fiscal
year 1996 to lease office space for its subsidiary in the United Kingdom. The
subsidiary has ceased operations and there are no future lease obligations.



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, for the calendar quarters indicated, 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.

                                                      HIGH             LOW
1995

Third Quarter (FROM JULY 25, 1995)                   9.750            8.750
Fourth Quarter                                       9.750            9.000

1996

First Quarter                                        9.750            9.250
Second Quarter                                       9.750            7.825
Third Quarter (THROUGH SEPTEMBER 30, 1996)           8.375            4.00

           As of October 1, 1996, there were (a) 4,751,015 shares of Common
Stock outstanding, held of record by approximately 160 persons, (b) outstanding
options to purchase an aggregate of 363,500 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 and markets telecommunications products for video conferencing,
collaborative computing and high-speed data transfer. During the first half of
the fiscal year ended June 30, 1996, the Company's activities were primarily
directed to completion of the development of the Eris System, while during the
second half of fiscal 1996 the Company's activities included sales and sales
support of the Eris System and new product development. During the fiscal year
ended June 30, 1995, the Company's activities were directed to development of
the Eris System and implementation of its marketing strategies. The Company also
began developing its distribution network in fiscal 1995. The following
discussion covers the fiscal years ended June 30, 1996 and 1995.

RESULTS OF OPERATION

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

           Net Sales. For 1996, net sales increased 606.8% to $1,625,720 from
$229,998 in 1995. Sales are derived primarily from the sale of the Eris System,
but also includes sales of cameras and other supplies used with the Eris System.
The first production unit was shipped in February 1995. Fiscal 1996 therefore
represents the first full year of unit sales, while 1995 had only 5 months of
sales.

           Gross Profit (Loss). Gross loss was $(396,980) for 1996 compared to a
gross profit of $51,336 or 22.3% of net sales for 1995. The 1996 gross loss
resulted from the termination of the third party manufacturing agreement with
Lucent. As part of the termination agreement, the Company has agreed to purchase
from Lucent any remaining component inventory after Lucent has manufactured 690
completed Eris Systems. During 1996, the Company recognized an impairment charge
to value the related inventory at the lower of cost or market. The Company
intends to utilize this component inventory with its new contract manufacturer,
Altron, Inc.

           Research and Development Expenses. Research and development expenses
were $1,540,416 or 94.8% of net sales for 1996 compared to $1,383,365 or 601.5%
of net sales for the same period last year. The decrease as a percentage of
sales was due entirely to the higher sales volume in 1996 as discussed above.
Actual dollar spending during 1996 was higher than the previous year due
to 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 1996 compared
to $1,180,365 or 513.2% of net sales for 1995. The percentage decrease was
primarily due to the higher sales volume in 1996 as discussed above. Actual
dollar spending during 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 1996.

           Interest Income and Interest Expense. Interest income was $180,521
for 1996 compared to $14 for the previous year. The increase in 1996 was due to
increased cash and cash equivalents available to the Company throughout 1996
from the Company's public offering in July 1995. Interest expense was $154 for
1996 compared to $5,705 for the same period last year. The decrease in 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.

           Net Operating Loss Carryforwards. The Company has net operating loss
carryforwards for financial and federal income tax reporting purposes of
approximately $6,500,000, which can be used to offset taxable income in future
years. Sales of the Company's equity during 1996 and 1995 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 1995 COMPARED TO FISCAL YEAR 1994

           The Company realized total net sales of $229,998 during the year
ended June 30, 1995. Cost of goods sold totaled $178,662 for this period,
resulting in a gross profit of $51,336 or 22.3% of net sales. The Company
incurred research and development expenses of $1,383,365 during this period,
while it continued to refine the Eris System and increase its technical staff.
These expenses related to personnel, contract engineering costs, tooling and
start up manufacturing expenses associated with the development and initial
production of the Eris System. General operating expenses for the year ended
June 30, 1995 were $1,180,365, including expenses related to the Company's
initial sales and marketing efforts. The Company also incurred $5,691 of net
interest expense for the year ended June 30, 1995.

           During the period from inception (December 21, 1993) through June 30,
1994, the Company commenced the development of the Eris System and established a
business infrastructure which included leasing office space, acquiring furniture
and equipment and recruiting personnel. The Company had no sales during this
period, and incurred $246,158 in research and development expenses and $222,982
in general and administrative expenses, resulting in a loss of $(470,829).

LIQUIDITY AND CAPITAL RESOURCES

           Cash and cash equivalents totaled $1,032,921 at June 30, 1996,
compared to $59,499 at June 30, 1995. The Company's working capital was
$2,345,828 at June 30, 1996 compared to a working capital deficit of $(6,528) at
June 30, 1995.

           Cash flows used in operating activities of $6,037,203 during 1996
were primarily due to a net loss of $(4,878,825), increases in accounts
receivable and inventories due to increases in net sales and a decrease in
accounts payable as a result of part of the proceeds from the initial public
offering being used to settle outstanding accounts payable.

           Cash flows used in investing activities of $458,604 during 1996 were
due to capital additions to property and equipment.

           Cash flows provided by financing activities of $7,469,229 during 1996
were due to proceeds from the issuance of common stock, primarily the Company's
initial public offering which generated net proceeds of $7,408,180.

           On September 30, 1996, the Company completed a private offering of
1,500,000 shares of Common Stock at $3.00 per share, resulting in net proceeds
to the Company of approximately $4,005,000. The Company is also negotiating a
line of credit with a bank but no agreement has been reached.

           The Company believes that the funds generated by the private
placement will be sufficient to cover cash needs until cash produced from sales
exceeds operating expenses, although there can be no assurance that this will
ever occur. Management plans to increase sales and improve operating results
include: offering new product configurations, expanding distribution of products
through a direct sales force and an expanded dealer network, and enhancing
dealer support services. In addition, the Company has initiated a product rental
program. In the event sales do not materialize at the expected rates, management
would conserve cash by reducing administrative expenses as well as product
development and sales and marketing efforts. To the extent that the Company
requires cash in excess of the funds generated by the private placement or
future operations, management would seek additional financing, but 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.

NEW ACCOUNTING PRONOUNCEMENTS.

           For fiscal year 1997, the Company is required to adopt the provisions
of Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS No. 121") and Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"). SFAS No. 121
prescribes accounting and reporting standards when circumstances indicate that
the carrying amount of an asset may not be recoverable. Initial application of
SFAS No. 121 is not expected to result in recognition of a cumulative effect of
a change in accounting principle by the Company. Under SFAS No. 123, companies
are permitted to adopt a new method of accounting for stock compensation awards
which is based on recognition of a charge equal to the estimated fair value of
the award on the date of the grant. Alternatively, companies may continue using
the methodology specified in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" to account for stock based
compensation, with expanded disclosure in the notes to the financial statements
of the pro forma effects on net earnings and earnings per share, assuming
application of the new accounting method outlined in SFAS No. 123. The Company
plans to implement the disclosure requirements for SFAS No. 123 in fiscal year
1997 and retain its current accounting method for stock-based employee
compensation.

ITEM 7.     FINANCIAL STATEMENTS.



                                RSI SYSTEMS, INC.

                        Consolidated Financial Statements

                             June 30, 1996 and 1995


                          INDEPENDENT AUDITORS' REPORT




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


We have audited the accompanying consolidated balance sheets of RSI Systems,
Inc. and subsidiary as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended and the period from December 21, 1993 (inception) through June 30, 1994.
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, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended and the period from December 21,
1993 (inception) through June 30, 1994, in conformity with generally accepted
accounting principles.


                                                       /S/ KPMG PEAT MARWICK LLP

Minneapolis, Minnesota
September 30, 1996


<TABLE>
<CAPTION>
                                RSI SYSTEMS, INC.

                           Consolidated Balance Sheets

                             June 30, 1996 and 1995


                                Assets                                            1996             1995
                                                                                  ----             ----
<S>                                                                          <C>                   <C>   
Current assets:
     Cash and cash equivalents                                               $  1,032,921          59,499
     Accounts receivable, net of allowance for doubtful
         accounts of $49,000 in 1996 and $12,000 in 1995                          524,433          71,358
     Inventories (note 4)                                                       1,744,222       1,176,304
     Prepaid expenses                                                             184,658          39,917
                                                                             ------------      ----------

                 Total current assets                                           3,486,234       1,347,078
                                                                             ------------      ----------


Property and equipment:
     Furniture and equipment                                                      619,807         166,021
     Leasehold improvements                                                         4,818               0
         Less accumulated depreciation                                           (168,282)        (33,591)

                 Net property and equipment                                       456,343         132,430


Other assets                                                                      316,000         248,500
     Less accumulated amortization                                               (239,919)       (180,294)
                                                                             ------------      ---------- 

                 Net other assets                                                  76,081          68,206
                                                                             ------------      ----------


                                                                             $  4,018,658       1,547,714
                                                                             ============      ==========



Liabilities and Stockholders' Equity


Current liabilities:
     Accounts payable                                                             278,820       1,196,118
     Accrued expenses (note 8)                                                    861,586         157,488
                                                                             ------------      ----------

                 Total current liabilities                                      1,140,406       1,353,606
                                                                             ------------      ----------


Stockholders' equity (note 11):
     Common stock, par value $.01 per share, authorized 10,000,000 shares;
         3,251,015 and 1,841,015 issued and outstanding at
         June 30, 1996 and 1995, respectively                                      32,510          18,410
     Additional paid-in capital                                                10,214,252       2,691,623
     Foreign currency translation adjustment                                       28,400           2,160
     Accumulated deficit                                                       (7,396,910)     (2,518,085)
                                                                             ------------      ---------- 

                 Total stockholders' equity                                     2,878,252         194,108
                                                                             ------------      ----------

Commitments and contingencies (notes 6 and 9)


                                                                             $  4,018,658       1,547,714
                                                                             ============      ==========

</TABLE>


See accompanying notes to consolidated financial statements.



<TABLE>
<CAPTION>
                                RSI SYSTEMS, INC.

                      Consolidated Statements of Operations

            For the years ended June 30, 1996 and 1995 and the period
            from December 21, 1993 (inception) through June 30, 1994


                                                      1996           1995           1994
                                                      ----           ----           ----
<S>                                               <C>                <C>                  <C>
Net sales                                         $ 1,625,720        229,998              0
Cost of goods sold                                 (2,022,700)       178,662              0
                                                  -----------     ----------       --------

             Gross profit (loss)                     (396,980)        51,336              0

Research and development                            1,540,416      1,383,365        246,158
Selling, general and administrative                 3,121,796      1,180,365        222,982
                                                  -----------     ----------       --------

             Operating loss                        (5,059,192)    (2,512,394)      (469,140)

Interest income  (expense):
     Interest income                                  180,521             14          1,821
     Interest expense                                    (154)        (5,705)        (3,510)
                                                  -----------     ----------       -------- 

             Interest income (expense), net           180,367         (5,691)        (1,689)
                                                  -----------     ----------       -------- 


             Net loss                             $(4,878,825)    (2,518,085)      (470,829)
                                                  ===========     ==========       ======== 


             Loss per share                       $     (1.56)         (1.31)         (0.29)
                                                  ===========     ==========      ========= 


             Weighted average shares and common
                 share equivalents outstanding      3,127,189      1,928,098      1,646,915
                                                  ===========     ==========      =========

</TABLE>


See accompanying notes to consolidated financial statements.



<TABLE>
<CAPTION>
                                RSI SYSTEMS, INC.

            Consolidated Statements of Stockholders' Equity (Deficit)

         For the years ended June 30, 1996 and 1995 and the period from
               December 21, 1993 (inception) through June 30, 1994


                                                                                      Additional
                                                                Common stock            paid-in
                                                            Shares       Amount         capital
                                                            ------       ------         -------


<S>                                                         <C>       <C>               <C>    
Common stock sold to a director [note 11(a)]                600,000   $     6,000       344,000

Common stock warrant sold to employee/
     director  [note 11(a)]                                 100,000         1,000        49,000

Common stock warrant issued to employee/director
     [note 11(b)]                                                 0             0        49,500

Common stock warrant sold to employee/director                    0             0           100

Net loss for period from inception
     through June 30, 1994                                        0             0             0
                                                          ---------   -----------     ---------


Balances at June 30, 1994                                   700,000         7,000       442,600

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

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

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

Common stock warrants issued to directors
     [note 9(d)]                                                  0             0       151,000

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

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

Common stock warrant sold to employee/director                    0             0           100

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

Reclassification of S-corporation accumulated deficit
     to additional paid-in capital [note 11(d)]                   0             0      (470,829)

Foreign currency translation adjustment                           0             0             0

Net loss for the year ended June 30, 1995                         0             0             0
                                                          ---------   -----------     ---------

Balances at June 30, 1995                                 1,841,015        18,410     2,691,623

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

Exercises of stock options                                   26,250           262        60,737

Common stock warrants issued to directors [note 9(d)]             0             0        67,500

Common stock warrant issued to underwriter                        0             0            50

Foreign currency translation adjustment                           0             0             0

Net loss for the year ended June 30, 1996                         0             0             0
                                                          ---------   -----------    ----------

Balances at June 30, 1996                                 3,251,015   $    32,510    10,214,252
                                                          =========   ===========    ==========

</TABLE>


(WIDE TABLE CONTINUED FROM ABOVE)


<TABLE>
<CAPTION>
                                                              Foreign                                                             
                                                              currency                                                             
                                                             translation   Accumulated                               
                                                             adjustment      deficit      Total  
                                                             -----------   -----------    -----  
                                                                                                                                   

<S>                                                               <C>           <C>      <C>    
Common stock sold to a director [note 11(a)]                      0             0        350,000

Common stock warrant sold to employee/
     director  [note 11(a)]                                       0             0         50,000

Common stock warrant issued to employee/director
     [note 11(b)]                                                 0             0         49,500

Common stock warrant sold to employee/director                    0             0            100

Net loss for period from inception
     through June 30, 1994                                        0      (470,829)      (470,829)
                                                             ======    ==========     ========== 


Balances at June 30, 1994                                         0      (470,829)       (21,229)

Common stock sold to employee/director [note 11(a)]               0             0        110,500

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

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

Common stock warrants issued to directors
     [note 9(d)]                                                  0             0        151,000

Common stock issued in private placements
     [note 11(a)]                                                 0             0      2,133,550

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

Common stock warrant sold to employee/director                    0             0            100

Conversion of note payable to common stock (note 5)               0             0        100,000

Reclassification of S-corporation accumulated deficit
     to additional paid-in capital [note 11(d)]                   0       470,829              0

Foreign currency translation adjustment                       2,160             0          2,160

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


Balances at June 30, 1995                                     2,160    (2,518,085)       194,108

Common stock sold in public offering [note 11(a)]                 0             0      7,408,180

Exercises of stock options                                        0             0         60,999

Common stock warrants issued to directors [note 9(d)]             0             0         67,500

Common stock warrant issued to underwriter                        0             0             50

Foreign currency translation adjustment                      26,240             0         26,240

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

Balances at June 30, 1996                                    28,400    (7,396,910)     2,878,252
                                                             ======    ==========      =========

</TABLE>


See accompanying notes to consolidated financial statements.



<TABLE>
<CAPTION>
                                RSI SYSTEMS, INC.

                      Consolidated Statements of Cash Flows

         For the years ended June 30, 1996 and 1995 and the period from
              December 21, 1993 (inception) through June 30, 1994


                                                                         1996           1995           1994
                                                                         ----           ----           ----
<S>                                                                  <C>             <C>              <C>      
Cash flows from operating activities:
     Net loss                                                        $(4,878,825)    (2,518,085)      (470,829)
     Adjustments to reconcile net loss to net cash used in
         operating activities:
             Depreciation and amortization                               194,316        191,056         22,829
             Common stock warrant issued to employees                          0        165,000         49,500
             Foreign currency translation adjustment                      26,240          2,160              0
             Changes in operating assets and liabilities:
                 Accounts receivable                                    (453,075)       (71,358)             0
                 Inventories                                            (567,918)    (1,222,104)             0
                 Prepaid expenses                                       (144,741)       (39,367)          (550)
                 Other assets                                                  0              0         (2,500)
                 Accounts payable                                       (917,298)     1,147,490         48,628
                 Accrued liabilities                                     704,098        199,708          3,580
                                                                      ----------      ---------        -------

                         Net cash used in operating activities        (6,037,203)    (2,145,500)      (349,342)
                                                                      ----------      ---------        -------

Cash flows from investing activities:
     Additions to furniture and equipment                               (458,604)      (133,953)       (27,068)
                                                                      ----------      ---------        -------
                     Net cash used in investing activities              (458,604)      (133,953)       (27,068)
                                                                      ----------      ---------        -------

Cash flows from financing activities:
     Proceeds from issuance of common stock                            7,469,179      2,315,162        400,000
     Proceeds from issuance of warrants                                       50            100            100
                                                                      ----------      ---------        -------
                         Net cash provided by financing activities     7,469,229      2,315,262        400,100
                                                                      ----------      ---------        -------

                         Increase in cash and cash equivalents           973,422         35,809         23,690

Cash and cash equivalents at beginning of period                          59,499         23,690              0
                                                                      ----------      ---------        -------

Cash and cash equivalents at end of period                           $ 1,032,921         59,499         23,690
                                                                     ===========      =========        =======


Supplemental disclosure of cash flow information:
     Cash paid during the period for interest                        $       154          5,716          2,935
                                                                     ===========      =========        =======
</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)].

     During fiscal year 1994, the Company purchased equipment and
         teleconferencing codec in exchange for a $100,000 note payable. The
         Company capitalized $5,000 of equipment and $95,000 of computer
         software related to this transaction (note 5).


See accompanying notes to consolidated financial statements.



                                RSI SYSTEMS, INC.

                   Notes to Consolidated Financial Statements

                             June 30, 1996 and 1995


    (1)   DESCRIPTION OF BUSINESS

          RSI Systems, Inc. (the Company) designs, develops and markets
              telecommunications products for videoconferencing, collaborative
              computing and high-speed data transfer. The Company was
              incorporated in Minnesota on December 21, 1993. Shipments of the
              Company's first product, the Eris Visual Communications System
              (the Eris System), began in February 1995. Prior to that time, the
              Company was considered a development stage enterprise.

    (2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          (a)    PRINCIPLES OF CONSOLIDATION

                 The consolidated financial statements include the accounts of
                    the Company and its wholly owned subsidiary located in the
                    United Kingdom, RSI Systems, Limited. All intercompany
                    accounts and transactions are eliminated in consolidation.

          (b)    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
                    $1,005,692 and $0 at June 30, 1996 and 1995, respectively.

          (c)    INVENTORIES

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

          (d)    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 three to seven years.

          (e)    OTHER ASSETS

                 Other assets consist of purchased teleconferencing codec,
                    capitalized financing costs and organization costs. The
                    teleconferencing codec is being amortized on a straight-line
                    basis over three years, capitalized financing costs are
                    being amortized on a straight-line basis over the terms of
                    the related letters of credit [see note 9(d)] and
                    organization costs are being amortized on a straight-line
                    basis over five years.

          (f)    WARRANTY ACCRUAL

                 The Company's product carries a one year warranty from a third
                    party custom manufacturer [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.

          (g)    REVENUE RECOGNITION

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

          (h)    RESEARCH AND DEVELOPMENT COSTS

                 Research and development costs are charged to operations when
                    incurred.

          (i)    INCOME TAXES

                 The Company accounts for income taxes in accordance with
                    Statement of Financial Accounting Standards No. 109,
                    ACCOUNTING FOR INCOME TAXES (FAS No. 109). Under the asset
                    and liability method of FAS 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
                    FAS 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.

          (j)    TRANSLATION OF FOREIGN CURRENCIES

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

          (k)    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 and
                    common share equivalents outstanding. For the 10-month
                    period ended April 30, 1995, and the period from December
                    21, 1993 (inception) through June 30, 1994, (the financial
                    statement periods included in the initial public offering
                    prospectus) common share equivalents result, under
                    Securities and Exchange Commission rules, from shares sold
                    or options and warrants granted within twelve months prior
                    to the date of an initial public offering at a per share
                    price less than that of the initial public offering ($6.25
                    per share). Common share equivalents outstanding for the
                    period from May 1, 1995 to June 30, 1995 and for the year
                    ended June 30, 1996 are not included in the loss per common
                    share calculation as their effect would be antidilutive.
                    Accordingly, 1,534,627 shares relating to shares sold and
                    options and warrants granted have been treated as common
                    share equivalents and resulted in 0, 576,684, and 1,135,921
                    additional common share equivalents outstanding for the
                    periods ended June 30, 1996, 1995, and 1994, respectively.

          (l)    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 AND GOING CONCERN

          On September 30, 1996, the Company completed a private offering of
              its common stock. The Company received $4,005,000, net of offering
              costs, in exchange for 1,500,000 shares of common stock ($3.00 per
              share). The Company has not registered the common stock offered
              pursuant to this private placement and, accordingly, these shares
              are restricted until such registration occurs. The Company has
              agreed to file a registration statement with the Securities and
              Exchange Commission within 90 days after the final closing of the
              sale of shares in this private placement. The Company is also
              negotiating a line of credit with a bank but no agreement has been
              reached.

          The Company believes the funds generated by the private placement will
              be sufficient to cover needs until cash from sales exceeds
              operating expenses. Management plans to increase sales and improve
              operating results include; offer new product configurations,
              expand distribution of products through a direct sales force and
              an expanded dealer network, and enhance dealer support services.
              In addition, the Company plans to initiate a product rental
              program beginning in October 1996. In the event sales do not
              materialize at the expected rates, management would conserve cash
              by reducing administrative expenses as well as product development
              and sales and marketing efforts.


    (4)   INVENTORIES

          Inventories consisted of the following at June 30:

   
                                              1996           1995
                                              ----           ----
    
Components                               $    303,615        652,041
Work in process                               952,456        150,851
Finished goods                                488,151        373,412
                                         ------------      ---------

                                         $  1,744,222      1,176,304
                                         ============      =========

    (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 convertible
              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:

              1997                      $    108,983
              1998                           102,898
              1999                            18,125


           Total rental expense was $136,680 and $30,561 for the years
              ended June 30, 1996 and 1995, respectively, and $11,100 for the 
              period from December 21, 1993 (inception) to June 30, 1994.

    (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 purchases cameras from
              VideoLabs and sells them as optional equipment with the Company's
              Eris System. During the years ended June 30, 1996 and 1995, the
              Company's purchases from VideoLabs totaled approximately $57,140
              and $25,000, respectively.

          A   former officer of the Company is associated with an engineering
              firm that rendered services to the Company. The Company paid the
              engineering firm approximately $187,000 during the period in which
              the individual was an officer of the Company [from December 21,
              1993 (inception) through August 1994].

    (8)   ACCRUED EXPENSES

          Accrued expenses consisted of the following at June 30:

                                                    1996          1995
                                                    ----          ----


Severance [note 9(c)]                           $   225,590            0
Inventory commitment [note 9(d)]                    382,192            0
Miscellaneous, other                                253,804      157,488
                                                -----------      -------

                                                $   861,586      157,488
                                                ===========      =======


    (9)   COMMITMENTS AND CONTINGENCIES

          (a)    ROYALTY AGREEMENTS

                 During 1996, the Company entered into a royalty agreement with
                    a software development company. Pursuant to the agreement,
                    the Company is 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 provides for a first year minimum royalty
                    commitment of $100,000. Sales of Eris Systems containing the
                    software per this royalty agreement are anticipated to begin
                    in fiscal year 1997.

                 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
                    systems, 1% royalty for the next 5,000 systems and 1/2%
                    royalty for the following 5,000 systems.

          (b)    SOFTWARE LICENSE AGREEMENTS

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

                 During 1994, the Company entered into a software license
                    agreement with a separate 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 for certain software used in the
                    Eris System.

          (c)    EMPLOYMENT AGREEMENTS

                 In July 1996, the Company entered into a two-year employment
                    agreement with the Company's President and Chief Executive
                    Officer. Pursuant to the agreement, the officer will receive
                    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.

                 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 seperation
                    settlement. On September 13, 1996, the fourth officer also
                    resigned from the Company.

          (d)    MANUFACTURING AGREEMENT

                 During 1996 and 1995, the Eris System was manufactured by a
                    third party custom manufacturer (the Manufacturer). The
                    Manufacturer provided substantially all parts and
                    manufacturing supplies for the Company's product.

                 On August 9, 1996, the Company and the Manufacturer terminated
                    the manufacturing agreement. Pursuant to this termination
                    agreement, the Manufacturer has agreed to produce, and the
                    Company has agreed to purchase, 690 completed Eris System
                    units. In addition, upon the completion of the 690 units,
                    the Company has agreed to purchase from the Manufacturer any
                    remaining component inventory. During the year ended June
                    30, 1996, the Company recognized an impairment charge to
                    value the related inventory at the lower of cost or market.
                    The Company intends to utilize this component inventory with
                    their new contract manufacturer.

                 On August 28, 1996, the Company entered into a new 
                    manufacturing agreement with another third party custom 
                    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
                    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 to $2 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 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 $8.00 per share
                    were issued as consideration for these guarantees. 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
                    will be reduced to the price at which such securities are
                    offered to investors. Based on the private placement
                    discussed in note 14(b), the exercise price of the 15,000
                    warrants was reduced to $3 per share. The estimated value of
                    the warrants was capitalized and is being amortized over the
                    terms of the letters of credit.

          (e)    DISTRIBUTOR, DEALER, AND MANUFACTURER REPRESENTATIVE AGREEMENTS

                 The Company has entered into distributor or dealer agreements
                    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 ranging from 20%
                    to 40% depending upon the number of systems ordered from the
                    Company.

                 The Company has also entered into manufacturer representative
                    agreements. The term of each agreement is one year and may
                    be terminated for nonperformance. The manufacturer
                    representatives receive a 6% commission on net sales, as
                    defined by the agreements.

   (10)   INCOME TAXES

           The Company originally elected the provisions of Subchapter S of the
               Internal Revenue Code. Accordingly, the Company's taxable loss
               was passed through to its stockholders to be included in their
               individual income tax returns. Effective July 1, 1994, the
               Company's S-corporation status was revoked, as requested by the
               Company [see note 11(d)]. The Company began operating as a
               Subchapter C corporation beginning July 1, 1994.

           At  June 30, 1996, the Company has approximately $6,500,000 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, the use of the net
               operating loss carryforward in any one year is limited to
               approximately $700,000.

           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, 1996 and 1995 is as follows:

                                               1996         1995
                                               ----         ----

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

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


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

                                                  1996              1995
                                                  ----              ----

Deferred tax assets:
   Net operating loss carryforwards         $    2,640,000         1,008,000
   Other                                           352,000            11,000
   Valuation allowance                          (2,992,000)       (1,019,000)
                                            --------------        ----------

            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, 1996 and 1995,
               are fully offset by a valuation allowance. The valuation
               allowance is reviewed annually.


   (11)   CAPITAL STOCK

          (a)    SALES OF COMMON STOCK

                 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. The proceeds are being used to fund continued
                    research and development, expand sales and marketing
                    activities, purchase capital equipment and for other general
                    corporate purposes, including working capital to finance
                    accounts receivable and inventory.

                 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 [see note 11(b)]. 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).

                 During the period from December 21, 1993 through June 30, 1994,
                    the Company sold common stock at fair market value to an
                    employee and to a director and received $400,000 for 700,000
                    shares of Company common stock ($.50 to $1.00 per share).

          (b)    STOCK WARRANTS

                 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.

                 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.

                 In February 1994, the Company issued warrants to an
                    employee/director of the Company for the purchase of 100,000
                    shares of Company common stock. Such warrants had a five
                    year term and were exercisable at $.005 per share. The
                    difference between the exercise price and the estimated fair
                    market value of the warrants was recorded as compensation
                    expense during the period ended June 30, 1994. As discussed
                    at note 11(a), these warrants were exercised in October
                    1994.

                 Also in February 1994, the Company issued warrants to another
                    employee/director of the Company for the purchase of 100,000
                    shares of Company common stock. Such warrants terminate at
                    the earlier of December 31, 1999 or upon the voluntary
                    resignation of the employee prior to January 1, 1996 and are
                    exercisable at $.50 per share.

                 In April 1994, the Company issued warrants to a separate
                    corporation for the purchase of 100,000 shares of Company
                    common stock. Such warrants have a five-year term and are
                    exercisable at $.50 per share.
                                                                                
                    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 400,000 shares of common stock for
                    issuance under the plan. 86,500 shares remained available at
                    June 30, 1996. Options issued become exercisable ratably
                    over the first four years from the grant date and certain
                    options are subject to accelerated vesting based upon
                    individual employment agreements. 79,375 and 0 shares were
                    exercisable at June 30, 1996 and 1995, respectively.

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

                                                        Price
                                          Shares      per share
                                          ------      ---------

Outstanding at June 30, 1995             242,500   $   2.20-6.25

     Granted                              71,000       6.25-9.25
     Exercised                           (26,250)      2.20-3.50
     Cancelled                           (33,750)      2.20-3.50
                                         -------   -------------


Outstanding at June 30, 1996             253,500   $   2.20-9.25
                                         =======   =============


          (d)    TERMINATION OF S-CORPORATION STATUS

                 Effective July 1, 1994, the Company's S-corporation status was
                    revoked, as requested by the Company. In accordance with
                    Securities and Exchange Commission rules, the Company's
                    accumulated deficit of $470,829 as of the termination of the
                    S-corporation election was reclassified against additional
                    paid-in capital.

          (e)    STOCK SPLIT

                 On September 9, 1994, the Company effected a two-for-one stock
                    split. All share and per share data for prior periods
                    presented have been restated to reflect the stock split.

          (f)    UNDESIGNATED COMMON STOCK

                 In June 1995, the Company authorized 5,000,000 undesignated
                    shares of common stock.

   (12)   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

                                                                                
                                                                                
                The following methods and assumptions were used to estimate
                the fair values of financial instruments:

                CASH AND CASH EQUIVALENTS

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


   (13)   FINANCIAL INFORMATION BY GEOGRAPHIC AREA

               The Company's net sales, loss from operations, and total assets
               summarized by geographical area is as follows:

                                1996             1995
                                ----             ----

Net sales:
    United States         $    1,399,947         217,518
    U.K. subsidiary              225,773          12,480
                          --------------      ----------

         Total            $    1,625,720         229,998
                          ==============      ==========

Loss from operations:
    United States         $  (4,303,030)     (2,375,157)
    U.K. subsidiary            (756,162)       (137,327)
                          --------------      ----------

         Total            $  (5,059,192)     (2,512,394)
                          =============      ==========

Total assets:
    United States         $    4,762,040       1,677,001
    U.K. subsidiary              272,391          43,373
    Eliminations             (1,015,773)       (172,660)
                          --------------      ----------

         Total            $    4,018,658       1,547,714
                          ==============       =========


   (14)   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, and no such losses are expected related to the balances
              of accounts receivable due from these customers as of June 30,
              1996.



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) EXECUTIVE OFFICERS AND DIRECTORS

         Information concerning Executive Officers and Directors of the Company
in the Company's 1996 Proxy Statement under the caption "Election of Directors"
is incorporated herein by reference.



           (B) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1996 Proxy Statement is incorporated
herein by reference.



ITEM 10.    EXECUTIVE COMPENSATION

           The information under the caption "Executive Compensation" in the
Company's 1996 Proxy Statement is incorporated herein by reference.

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 1996 Proxy Statement is
incorporated herein by reference.


ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information under the caption "Certain Relationships and Related
Transactions" in the Company's 1996 Proxy Statement is incorporated herein by
reference.

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K

           (a)  EXHIBITS. See Exhibit Index at page 14, 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 1996.


                                   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: October 15, 1996                   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 October 15, 1996.

                                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
---------------------------------------
Donald C. Lies                                    Executive Officer (principal
                                                  executive, financial and 
                                                  accounting officer)

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

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

                                                  Director
---------------------------------------
Byron G. Shaffer

/s/ Dennis A. Leese                               Vice Chairman of the Board
---------------------------------------
Dennis A. Leese


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




<TABLE>
<CAPTION>

                                RSI SYSTEMS, INC.
                                EXHIBIT INDEX TO
                  FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1996


     Item No.                    Title of Document                                Method of Filing
-------------------- ------------------------------------------- ----------------------------------------------------
<C>                  <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 Distribution Agreement              Filed as Exhibit 10.3 to the SB-2 Registration
                                                                 Statement and incorporated herein by reference.`

10.3                 Form of Manufacturers' Representative       Filed as Exhibit 10.4 to the SB-2  Registration
                     Agreement                                   Statement and incorporated herein by reference.

10.4                 Employment Agreement between the Company    Filed as Exhibit 10.5 to the SB-2 Registration
                     and Dennis A. Leese*                        Statement and incorporated herein by reference.

10.5                 Employment Agreement between the Company    Filed as Exhibit 10.6 to the SB-2 Registration
                     and Douglas S. Clapp*                       Statement and incorporated herein by reference.

10.6                 Employment Agreement between the Company    Filed as Exhibit 10.7 to the SB-2 Registration
                     and William J. Brummond*                    Statement and incorporated herein by reference.

10.7                 Employment Agreement between the Company    Filed as Exhibit 10.8 to the SB-2 Registration
                     and Bryan R. Gray*                          Statement and incorporated herein by reference.

10.8                 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                                   

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

10.10                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.

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

10.12                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.

10.13                Development agreement between the Company   Filed as Exhibit 10.17 to the SB-2 Registration
                     and ZH Computer Inc., with a supplement     Statement and incorporated herein by reference.

10.14                OEM Agreement with NBSI, dated March 17,    Filed as Exhibit 10.18 to the SB-2 Registration
                     1995                                        Statement and incorporated herein by reference.

10.15                License Agreement with DSP Software         Filed herewith electronically.
                     Engineering, Inc. dated February 1, 1996

10.16                Manufacturing Agreement with Lucent         Filed herewith electronically.
                     Technologies, Inc. dated August 9, 1996

10.17                Addendum to License Agreement with Link     Filed herewith electronically.
                     Technology, Inc. dated April 29, 1996

10.18                International Distributor Agreement with    Filed herewith electronically.
                     Canon Trading USA dated September 20, 1996

10.19                OEM Agreement with Future Labs, Inc.        Filed herewith electronically.
                     dated March 8, 1996

10.20                Employment Agreement between the Company    Filed herewith electronically.
                     and Donald Lies*

10.21                Manufacturing Agreement with Altron, Inc.   Filed herewith electronically.
                     dated August 28, 1996

10.22                Separation Agreement and Release between    Filed herewith electronically.
                     Company and Douglas S. Clapp dated May 1,
                     1996*

10.23                Selling Agency Agreement with Miller        Filed herewith electronically.
                     Johnson & Kuehn Incorporated dated August
                     22, 1996

10.24                Shareholder Agreement dated April 30, 1996  Filed herewith electronically.

21.1                 Subsidiary of the Registrant                Filed herewith electronically.

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>

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

         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.