<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                              ---------------------

                                    FORM 10-Q

          /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

                For the Quarterly Period Ended September 30, 1996
                                       or
          / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                For the transition Period from ______ to ______.


                         Commission file number 0-18511

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


                       DIGITAL SYSTEMS INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)

                 WASHINGTON                               91-1273645
      (State or other jurisdiction of       (IRS Employer Identification No.)
      incorporation or organization)



                6464 185TH AVE. N.E.
                REDMOND, WASHINGTON                                     98052
      (Address of principal executive offices)                       (Zip Code)


                                 (206) 881-7544
               (Registrant's telephone number including area code)

Indicate by check mark 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


Common stock, par value $0.01 per share: 9,439,688 shares outstanding as of 
September 30, 1996.

                    Page 1 of 17 sequentially numbered pages.

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<PAGE>   2
              DIGITAL SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
                                    FORM 10-Q

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996

                                TABLE OF CONTENTS
                              ---------------------

<TABLE>
<CAPTION>

PART I:  FINANCIAL INFORMATION                                          PAGE NO.
                                                                        --------
<S>               <C>                                                   <C>
Item 1.           Financial Statements                                    3

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


PART II:  OTHER INFORMATION
Item 6.           Exhibits and Reports on Form 8-K                       16

</TABLE>
<PAGE>   3
PART I:

ITEM 1. FINANCIAL STATEMENTS

DIGITAL SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)                                               SEPT. 30, 1996     DEC. 31, 1995
---------------------------------------------------------------------------------------------
                                                             (UNAUDITED)

<S>                                                          <C>                <C>
ASSETS
Current assets:
      Cash and cash equivalents and short-term investments     $ 30,043           $ 39,762
      Trade accounts receivable, net                             24,420             22,206
      Inventories                                                 2,175              2,958
      Current installments of contracts receivable                2,064              2,797
      Prepaid expenses and other current assets                   3,623              2,228
                                                               --------           --------
            Total current assets                                 62,325             69,951

Furniture, equipment, and leasehold improvements, net             6,019              5,508
Contracts receivable, less current installments                     946              1,793
Capitalized software costs, net                                   2,141              2,870
Other assets                                                      5,269              1,069
                                                               --------           --------

      Total assets                                             $ 76,700           $ 81,191
                                                               ========           ========


LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
      Current installments of long-term obligations           $      81           $     77
      Accounts payable                                            3,412              4,270
      Accrued compensation                                        3,289              2,082
      Other accrued expenses                                      4,760              5,583
      Customer deposits and unearned revenue                      3,695              9,730
                                                              ---------           --------
            Total current liabilities                            15,237             21,742

Deferred federal income taxes                                       739              1,199
Other long-term liabilities                                         453                738
                                                              ---------           --------
      Total liabilities                                          16,429             23,679

Shareholders' equity                                             60,271             57,512
                                                              ---------           --------

      Total liabilities and shareholders' equity              $  76,700           $ 81,191
                                                              =========           ========
</TABLE>




   See accompanying notes to the condensed consolidated financial statements.

                                     Page 3
<PAGE>   4
<TABLE>
<CAPTION>

DIGITAL SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)               THREE MONTHS ENDED SEPT. 30,               NINE MONTHS ENDED SEPT. 30,
-----------------------------------------------------------------------------------------------------------------------------------
                                                      1996            1995        (UNAUDITED)      1996           1995
<S>                                                 <C>            <C>                         <C>              <C>   
Revenue:
   Product sales                                    $ 15,103       $  11,128                   $ 42,694          $ 32,093
   Service and miscellaneous                           6,556           5,516                     19,807            16,274
                                                    --------       ---------                   --------          --------
                                                      21,659          16,644                     62,501            48,367
                                                    --------       ---------                   --------          --------
Cost of product sales and service:
   Product sales                                       4,559           4,324                     14,044            12,824
   Service and miscellaneous                           3,518           2,043                      9,301             6,387
                                                    --------       ---------                   --------          --------
                                                       8,077           6,367                     23,345            19,211
                                                    --------       ---------                   --------          --------
        Gross profit                                  13,582          10,277                     39,156            29,156

Operating expenses:
   Selling, general and administrative                 7,682           5,966                     21,661            18,055
   Research and development                            2,393           1,591                      7,728             5,034
   Write-off of capitalized software costs                --              --                        705                --
   Purchase of in-process research
         and development                                  --              --                      4,307                --
                                                    --------       ---------                   --------          --------
         Total operating expenses                     10,075           7,557                     34,401            23,089
                                                    --------       ---------                   --------          --------
         Operating income                              3,507           2,720                      4,755             6,067

Other income, net                                        438             517                      1,309             1,624
                                                    --------       ---------                   --------          --------

         Earnings before income taxes                  3,945           3,237                      6,064             7,691

Income tax expense                                     1,188           1,186                      3,480             2,807
                                                    --------       ---------                   --------          --------

         Net earnings                               $  2,757       $   2,051                   $  2,584          $  4,884
                                                    ========       =========                   ========          ========

Net earnings per share                              $   0.28       $    0.21                   $   0.26          $   0.50
                                                    ========       =========                   ========          ========

Weighted average common shares and
   common share equivalents outstanding                9,901           9,777                      9,843             9,814
</TABLE>





   See accompanying notes to the condensed consolidated financial statements.

                                     Page 4
<PAGE>   5
<TABLE>
<CAPTION>

DIGITAL SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)                                                                            NINE MONTHS ENDED SEPT. 30,
------------------------------------------------------------------------------------------------------------------------------------
                                                                                         1996                     1995
                                                                                                (UNAUDITED)

<S>                                                                                     <C>                      <C>  
Net cash provided by (used in) operating activities:                                    $   (1,792)              $  8,343
                                                                                        ----------              --------
Cash flows from investing activities:
     Purchase of short-term investments                                                    (32,373)              (35,282)
     Proceeds from the maturity of short-term investments                                   38,686                    --
     Purchase of furniture, equipment, and leasehold improvements                           (2,696)               (1,622)
     Additions to capitalized software costs                                                  (902)               (1,444)
     Increase in long term notes receivable                                                 (4,000)                   --
     Other                                                                                    (443)                  414
                                                                                        ----------              --------

Net cash used in investing activities                                                       (1,728)              (37,934)
                                                                                        ----------              --------

Effect of exchange rate changes on cash                                                         82                    50

Cash flows from financing activities:
     Repayment of long-term obligations                                                        (56)                 (922)
     Purchase of treasury stock                                                             (1,226)               (4,048)
     Issuance of additional common shares                                                    1,314                   289
                                                                                        ----------              --------

Net cash provided by (used in) financing activities                                             32                (4,681)
                                                                                        ----------              --------

Decrease in cash and cash equivalents                                                       (3,406)              (34,222)
Cash and cash equivalents at beginning of period                                             5,914                40,971
                                                                                        ----------              --------

Cash and cash equivalents at end of period                                                   2,508                 6,749

Short-term investments at end of period                                                     27,535                35,468
                                                                                        ----------              --------

Cash and cash equivalents and
    short-term investments at end of period                                             $   30,043              $ 42,217
                                                                                        ==========              ========


</TABLE>





   See accompanying notes to the condensed consolidated financial statements.

                                     Page 5
<PAGE>   6
              DIGITAL SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.       BASIS OF PRESENTATION

         The accompanying condensed consolidated financial statements include
         the accounts of Digital Systems International, Inc. and its wholly
         owned subsidiaries, collectively referred to as the "Company". The
         unaudited interim condensed consolidated financial statements and
         related notes have been prepared pursuant to the rules and regulations
         of the Securities and Exchange Commission. Accordingly, certain
         information and footnote disclosures normally included in financial
         statements prepared in accordance with generally accepted accounting
         principles have been omitted pursuant to such rules and regulations.
         The accompanying condensed consolidated financial statements and
         related notes should be read in conjunction with the audited
         consolidated financial statements and notes thereto included in the
         Company's annual report on Form 10-K for the year ended December 31,
         1995.

         The information furnished reflects, in the opinion of management, all
         adjustments, consisting of only normal recurring items, necessary for a
         fair presentation of the results for the interim periods presented.
         Interim results are not necessarily indicative of results for a full
         year.

2.       INVENTORIES
         A summary of inventories is as follows:
<TABLE>
<CAPTION>

         (IN THOUSANDS)                   SEPT. 30, 1996         DEC 31, 1995
                                          --------------         ------------
                                           (UNAUDITED)
<S>                                       <C>                    <C>
         Raw materials                       $  898                  $  838
         Work in process                        491                   1,269
         Finished goods                         245                      26
         Installations in progress              212                     610
         Spare parts                            329                     215
                                             ------                  ------
                Total                        $2,175                  $2,958
                                             ======                  ======
</TABLE>

3.       EARNINGS PER SHARE

         Net earnings per share is computed using the weighted average number of
         common shares outstanding plus dilutive common equivalent shares
         outstanding during the period. Common equivalent shares are calculated
         under the treasury stock method and consist of unexercised stock
         options. Fully diluted earnings per share for all periods presented
         were not materially different from primary earnings per share.


                                     Page 6
<PAGE>   7







4.       NEW ACCOUNTING STANDARD

         In October 1995, the Financial Accounting Standards Board issued
         Statement No. 123, Accounting for Stock-Based Compensation. This
         pronouncement establishes accounting and reporting standards for
         stock-based employee compensation plans, including: stock purchase
         plans, stock options and stock appreciation rights. This new
         pronouncement defines a fair value based method of accounting for these
         equity instruments. This method measures compensation cost based on the
         value of the award and recognizes that cost over the service period.
         Companies may elect to adopt this standard or to continue accounting
         for these types of equity instruments under current guidance, APB
         Opinion No. 25, Accounting for Stock Issued to Employees. Companies
         which elect to continue using the rules of Opinion No. 25 must make pro
         forma disclosures of net income and earnings per share as if this new
         pronouncement had been applied. This new reporting standard is required
         for fiscal years beginning after December 15, 1995.

         The Company has elected to continue accounting for such types of equity
         instruments in accordance with the rules of APB Opinion No. 25 and will
         make the required pro forma disclosures in its December 31, 1996
         audited consolidated financial statements.

5.       RECLASSIFICATIONS

         Certain reclassifications have been made to the prior period financial
         statements to conform with the current quarter presentation.

6.       SUBSEQUENT EVENT

         In October 1996, the Company announced it had entered into a Merger
         Agreement with ViewStar Corporation ("ViewStar"), an enterprise
         business process and document management software provider . Pursuant
         to the Merger Agreement, which is subject to approval of both company's
         shareholders, ViewStar would become a wholly-owned subsidiary of the
         Company through the exchange of 0.693 shares of the Company's common
         stock for each share of ViewStar stock. The proposed merger will be
         submitted to a vote of shareholders in December 1996. The merger is
         expected to be accounted for as a pooling-of-interests.

         The Company has filed a proxy statement with the Securities and
         Exchange Commission relating to the merger proposal which more fully
         describes the proposed merger.

         In September 1996, prior to negotiation of the Merger Agreement , the
         Company and ViewStar entered into a Joint Marketing and Product
         Development Agreement. In addition the Company entered into a loan
         agreement under which the Company provided ViewStar with $4.0 million
         of debt financing to fund joint product development efforts. This loan
         to ViewStar is included in Other Assets in the September 30, 1996
         Condensed Consolidated Balance Sheet.


                                     Page 7
<PAGE>   8
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
           AND FINANCIAL CONDITION



         RESULTS OF OPERATIONS

         OVERVIEW

         For the third quarter of 1996, the Company reported an increase in
         revenue to $21.7 million compared with $16.6 million reported in the
         third quarter of 1995. The Company reported third quarter 1996 net
         earnings of $2.8 million, or $.28 per share, compared with net earnings
         of $2.1 million, or $.21 per share, for the comparable quarter of 1995.

         For the nine months ended September 30, 1996, the Company reported net
         earnings of $2.6 million, or $.26 per share. In February 1996, the
         Company acquired Caleo Software, Inc. and wrote-off $4.3 million of
         in-process research and development costs associated with the
         acquisition. In addition, the Company wrote-off $0.7 million of
         previously capitalized software costs. Excluding these charges, net
         earnings for the first nine months of 1996 would have been $7.3
         million, or $.75 per share, compared to $4.9 million, or $.50 per
         share, for the first nine months of 1995.

         REVENUE

         Revenue of $21.7 million for the third quarter of 1996 represented a
         30% increase over revenue of $16.6 million reported in the comparable
         quarter of the prior year. Product sales increased $4.0 million or 36%
         to $15.1 million in 1996 versus $11.1 million in 1995. Service and
         miscellaneous revenue increased by $1.1 million or 20% to $6.6 million
         from $5.5 million as a result of increased professional service
         revenues and larger installed base. International revenue decreased to
         $2.9 million in the third quarter of 1996 from $3.6 million in the
         comparable quarter for 1995, due to decreased product sales in Europe,
         Africa and Asia.

         Revenues of $62.5 million for the nine months ended September 30, 1996
         represented a 29% increase over revenue of $48.4 million reported in
         the comparable period of the prior year. Product sales increased $10.6
         million or 33% to $42.7 million in 1996 versus $32.1 million in 1995.
         Service and miscellaneous revenue increased by $3.5 million or 22%, to
         $19.8 million from $16.3 million as a result of increased professional
         service and customer support revenues. International revenue increased
         to $9.9 million in 1996 from $8.6 million in 1995, due to increased
         product sales in Europe, Africa and Asia. The overall revenue increase
         was influenced by continuing acceptance of the MOSAIX 5300 Series
         products by customers in the telecommunications, financial services,
         and retailing industries.

         In the third quarter of 1996, the sale of MOSAIX systems to three
         customers accounted for 32% of the total product revenue, while three
         customers accounted for 35% in the third quarter of 1995. For the first
         nine months of 1996, the sales of MOSAIX systems to three customers
         accounted for 21.5% of that period's total product revenue, while three
         customers accounted for 30.6% for the first nine months of 1995.

         GROSS MARGIN

         Total gross margin remained constant at approximately 63% of revenue
         for both the third quarter of 1996 and the comparable period last year.
         Product gross margin, however, was



                                     Page 8
<PAGE>   9
         70% in the third quarter of 1996 compared to 61% in the comparable
         period of the prior year. Product gross margins are influenced, in
         part, by the increase in sales volume as well as changes in product
         mix, overhead coverage, and software amortization expense. During the
         third quarter of 1996, the Company sold a greater proportion of
         larger-scale, complex telemarketing and financial services application
         products in the MOSAIX 5300 Series, which typically carry higher
         margins. In addition, certain systems component costs were reduced and
         software amortization expense was approximately $.3 million versus $.5
         million for the comparable quarter a year ago. The reduction in service
         and miscellaneous gross margin to 46% compared to 63% in the comparable
         period of the prior year was related to the increased revenue
         contribution of lower margin professional service revenues and
         increased customer support expenses as a result of increased costs in
         providing customer support (people) and increased costs from an
         expansion of the Company's customer support infrastructure (software
         and systems).

         Gross margin improved to 63% for the first nine months of 1996 from 60%
         for the first nine months of 1995. Gross margin on product sales was
         67% for the first nine months of 1996 compared to 60% in the comparable
         period of the prior year. This change in product gross margins was
         influenced, in part, by the increase in sales volume as well as product
         mix, overhead coverage, and software amortization expense. During the
         first nine months of 1996, the Company sold a greater proportion of
         large scale, complex telemarketing and financial services application
         products in the MOSAIX 5300 Series which contributed to the increase in
         gross margins. Gross margin in 1995 included accelerated software
         amortization expense resulting from the replacement of earlier versions
         of MOSAIX software with the MOSAIX 5000 Series products. For the first
         nine months of 1996 the Company expensed $1.9 million related to
         software amortization, compared to $2.4 million in the comparable
         period a year ago. Gross margin on service and miscellaneous revenue
         for the first nine months of 1996 was 53% compared to 61% in the
         comparable period of the prior year, due to a higher mix of lower
         margin professional service revenues and lower customer support margins
         as a result of increased costs mentioned above.

         SELLING, GENERAL AND ADMINISTRATIVE

         Selling, general and administrative expenses were $7.7 million or 35%
         of revenue in the third quarter of 1996, compared to $6.0 million or
         36% of revenue in the comparable period of the prior year. For the nine
         months ended September 30, 1996, selling, general and administrative
         expenses were $21.7 million or 35% of revenue compared to $18.1 million
         or 37% in 1995. While selling, general and administrative expenses
         decreased as a percentage of revenue, the increase in spending resulted
         from increased travel expenses, an expansion of marketing related
         activities, advertising from personnel costs.

         RESEARCH AND DEVELOPMENT

         Research and development expense, net of amounts capitalized as
         software development costs, was $2.4 million or 11% of revenue in the
         third quarter of 1996, compared to $1.6 million or 10% of revenue in
         the comparable quarter of the prior year. Research and development
         spending increased to $2.7 million from $2.0 million, and software
         costs capitalized as a percent of spending were 10% (or $0.3 million)
         in the third quarter of 1996 compared to 22% (or $0.5 million) in the
         third quarter of 1995. The increase in research and development
         expenses is due to increased investment in the development of software
         applications and a decrease in the amount of capitalized research and
         development costs.

         For the nine months ended September 30, 1996, research and development
         expenses net of amounts capitalized, were $7.7 million, or 12% of
         revenue, compared with $5.0 million or


                                     Page 9
<PAGE>   10
         10% of revenue in the comparable period of the prior year. Gross
         research and development spending increased to $8.8 million from $6.5
         million due primarily to increases in engineering staff and outside
         contractors. Software costs capitalized as a percentage of research and
         development spending were 11% ($0.9 million) in the first nine months
         of 1996 and 22% ($1.4 million) in the first nine months of 1995.

         The Company remains committed to the ongoing development of new
         products and improvements to existing products as a key source of
         future revenue. The Company expects to invest approximately 10-12% of
         revenue in new product development. However, from time to time, the
         Company may exceed the current level of investment in product
         development.

         In February 1996, the Company acquired Caleo Software, Inc. and
         wrote-off $4.3 million of in-process research and development costs
         associated with the acquisition. In addition, the Company wrote-off
         $0.7 million of previously capitalized software costs due to rapidly
         changing technology. Capitalized software costs continue to decrease,
         and as of September 30, 1996, has been reduced to $2.1 million compared
         to $2.9 million at December 31, 1995.

         OTHER INCOME, NET

         Net other income is comprised primarily of interest income, and was
         $0.4 million in the third quarter of 1996, compared with $0.5 million
         in the comparable period of the prior year. Year-to-date other income
         totaled $1.3 million versus $1.6 million in 1995. Interest income was
         slightly lower in 1996 compared to the prior year due to a decrease in
         cash and short-term investments.

         INCOME TAXES

         The effective tax rate for the third quarter of 1996 was 30% compared
         to 37% in 1995. The rate difference was primarily due to a lower actual
         1995 tax rate than previously estimated. This tax credit will be
         recognized over both the third and fourth quarters of 1996. This lower
         rate resulted from additional Foreign Sales Corporation commissions and
         a favorable change in the tax rules for research and development
         credits. The year-to-date effective tax rate, including the effect of
         the in-process research and development write-off related to the Caleo
         acquisition in the first quarter of 1996 was 57% in 1996 versus 36% in
         1995. This unusually high tax rate is the result of the in-process
         research and development write-off not being deductible for tax
         purposes. Excluding the $4.3 million charge, the Company's nine-month
         1996 effective tax rate would have been 34% compared to 36% in the
         comparable period of the prior year.



         FINANCIAL CONDITION

         LIQUIDITY & CAPITAL RESOURCES

         The Company's combined cash and cash equivalents and short-term
         investments were $30.0 million at September 30, 1996 versus $39.8
         million at December 31, 1995. The short-term investment portfolio is
         invested in municipal securities, corporate notes and bonds, and
         commercial paper, and is diversified among security types and issuers.
         It does not include any derivative products. At September 30, 1996, the
         Company's working capital was $47.1 million compared to $48.2 million
         at December 31, 1995.



                                    Page 10
<PAGE>   11
         During the first nine months of 1996, the Company used $1.8 million in
         cash from operations compared to $8.3 million generated in 1995. The
         use of cash from operating activities in the nine months ended
         September 30, 1996 was due primarily to the purchase of Caleo Software,
         Inc. for $4.8 million in cash during February 1996, as well as a
         decrease in customer deposits and an increase in accounts receivable.
         Of the $4.8 million Caleo purchase price, $4.3 million was charged to
         operations as in-process research and development costs.

         During the first nine months of 1996, the Company invested $2.7 million
         to purchase furniture, equipment, and leasehold improvements compared
         to $1.6 million for the first nine months of the prior year. The
         increase is primarily due to the investment in internal customer
         management hardware and software systems. The Company made repayments
         on long-term obligations of $0.1 million in 1996 versus $0.9 million in
         1995. As discussed in Note 6 to the Condensed Consolidated Financial
         Statements, the Company's cash position was reduced in 1996 by a $4.0
         million loan to ViewStar.

         The Board of Directors has authorized management to repurchase, from
         time to time, subject to certain conditions and limitations, up to
         1,600,000 shares of common stock of the Company. During the third
         quarter of 1996, the Company repurchased 83,000 shares at a cost of
         $1.2 million. As of September 30, 1996, a total of 691,000 shares have
         been repurchased at a cost of approximately $5.5 million. The
         repurchase plan was suspended on October 2, 1996.

         In addition to its cash and short term investment balances, the Company
         has available a $10 million domestic line of credit to meet cash flow
         needs. The Company has elected not to renew a second $10 million
         line of credit at this time. Management believes that existing cash and
         short-term investments and cash flow from operations, together with its
         available credit line, will continue to be sufficient to meet ongoing
         operating requirements as well as the Company's investment in capital
         additions and research and development activities. In connection with
         research and development and market expansion, cash may be used to
         acquire technology or to fund strategic ventures.


         FACTORS AFFECTING FUTURE RESULTS AND REGARDING FORWARD-LOOKING 
         STATEMENTS

         The Company, in its annual report to shareholders, its annual report on
         Form 10-K, its quarterly reports on Form 10-Q and in other documents
         filed with the Securities and Exchange Commission, as well as its press
         releases and oral communications, has made and may in the future
         continue to make forward-looking statements. When used in these
         contexts, the words "believes", "anticipates", "expects" and similar
         expressions are intended to identify forward-looking statements.
         Readers are cautioned not to place undue reliance on these
         forward-looking statements, which speak only as of the date of such
         statement. The Company undertakes no obligation to publicly release
         results of any revisions of such forward looking statements that may be
         made to reflect events or circumstances after the date of any such
         statement or to reflect the occurrence of unanticipated events.

         As indicated in Note 6 of notes to the Condensed Consolidated Financial
         Statements, in October 1996, the company entered into a merger
         agreement with ViewStar. On October 25, 1996, the Company filed a
         registration statement on Form S-4 with the Securities and Exchange 
         Commission (the "Registration Statement"), which also sets forth 
         information 

                                    Page 11
<PAGE>   12
         about such business combination and the risks and uncertainties which
         could, in addition to the factors set forth below, have a material
         impact on the Company's operations and its ability to achieve the
         results expressed in forward-looking statements. Reference is made to
         the Registration Statement for a full description of such risks and
         uncertainties.

         Within the foregoing limitations, the following important factors,
         among others, could cause the Company's actual results to differ
         materially from those expressed in the Company's forward-looking
         statements in the contexts in which they are made.

         FUTURE OPERATING RESULTS AND QUARTERLY FLUCTUATIONS. The Company
         believes that its quarterly operating results could be subject to
         fluctuations for a variety of reasons. The Company currently operates
         with a small backlog relative to its revenue; thus, most of its sales
         in each quarter result from orders received in the current or prior
         quarter. In addition, because prices for the Company's products are
         relatively substantial, a significant portion of net sales for each
         quarter is attributable to a relatively small number of orders and
         customers. Sales in a quarter depend in part on the configuration of
         systems sold and on the volume and timing of bookings received during
         the current and prior quarter. In addition, the Company's operating
         expenses are relatively fixed in the short term. As a result,
         variations in timing of revenue can cause significant variations in
         quarterly results of operations. The Company's operating results for
         any quarter are, accordingly, not necessarily indicative of results for
         any future period.

         COMPETITION. The market for call processing systems and software is
         intensely competitive. The Company competes directly with three
         principal competitors and indirectly with a number of other
         competitors, some of whom have substantially greater financial,
         technical and marketing resources than the Company.

         PRODUCT CONCENTRATION, TECHNOLOGICAL CHANGE. The market for the
         Company's products and services is subject to rapid technological
         changes, requiring continual research and development expenditures by
         the Company. Competitors or new market entrants may introduce new
         products, features or services, or changes in communication technology
         could develop, that could adversely affect the competitive position of
         the Company's products and services in some or all of its markets.
         During the past two years, the Company's products have changed rapidly
         and significantly. Though the Company continues to invest significantly
         in research and development, there is no assurance that the Company
         will be able to maintain its competitive position.

         MARKET. The Company's future financial performance will depend on the
         size and rate of growth of the call center customer management market.
         Future development of this market will depend upon the expansion of
         current applications, successful creation of new applications for
         existing markets, and the increasing acceptance of call processing
         technology.

         REGULATORY ENVIRONMENT. While existing industry legislation does not
         directly regulate the manufacture and sale of the Company's products,
         certain existing legislation affects the ability of the Company's
         customers to use some of its products in certain ways. For example, The
         Company's MOSAIX systems may not be used for certain prohibited debt
         collection and remote telephone solicitation practices, nor may they be
         used under certain circumstances to leave or play artificial or
         prerecorded messages. The adoption of legislation at the federal or
         state level and the promulgation of regulations under such statutes
         could have adverse affects on the Company's results by regulating the
         use of the Company's products and services.


                                    Page 12
<PAGE>   13
         INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. Despite the Company's
         efforts to protect its proprietary rights, unauthorized parties may
         attempt to copy aspects of the Company's products or to obtain and use
         information the Company regards as proprietary. Although the Company
         has not registered its copyrighted software, the Company's software is
         protected by copyright and trade secrets laws. There can be no
         assurance that steps taken by the Company to protect its proprietary
         rights will be adequate to deter misappropriation or independent
         third-party development of its technology.



                                    Page 13
<PAGE>   14
PART II:    OTHER INFORMATION


Item 1.   LEGAL PROCEEDINGS.

          None

Items 2.  CHANGES IN SECURITIES

          None

Item 3.   DEFAULTS UPON SENIOR SECURITIES
          None

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
          None

ITEM 5    OTHER INFORMATION


                                    Page 14
<PAGE>   15
          ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


         (a)      Exhibits
                  11.  Computation of Earnings Per Share is on page 14.


         (b)      Reports on Form 8-K.  There were no reports on Form 8-K filed 
                  during the three months ended September 30, 1996.



                                    Page 15
<PAGE>   16
SIGNATURE


Pursuant to the requirements 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.

                                            DIGITAL SYSTEMS INTERNATIONAL, INC.
                                                                    (Registrant)


DATE:  November 14, 1996                       BY:   Richard L. Anderson
                                                  ______________________________
                                                     Richard L. Anderson
                                                     Vice President - Controller
                                                     (Chief Accounting Officer)


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