Abstract. The main goal of this paper is to look at the classical Schur algorithm from the perspective of System Theory. We will confine our considerations to rational inner functions. This will allow us to avoid questions involving limits and will enable us to concentrate on the algebraic aspects of the problem at hand. Given a non-negative integer n, we describe all system realizations of a given rational inner function of degree n in terms of an appropriately constructed equivalence relation in the set of all unitary (n + 1) × (n + 1)-matrices. The concept of Redheffer coupling of colligations gives us the possibility to choose a particular representative from each equivalence class. The Schur algorithm for a rational inner function is, consequently, described in terms of the state space representation.