SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               ------------------

                                   FORM 10-KSB
                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

  For the fiscal year ended December 31, 2003   Commission file number 333-43770

                             SLS INTERNATIONAL, INC.

Incorporated under the Laws of the            I.R.S. Employer Identification No.
         State of Delaware                               52-2258371

                 3119 SOUTH SCENIC, SPRINGFIELD, MISSOURI 65807
                                 (417) 883-4549

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      None

         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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the Proxy Statement incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]

         The revenue of SLS International, Inc. in the year ended December 31,
2003 was $968,245.

         The aggregate market value of SLS International, Inc. voting stock held
by nonaffiliates was approximately $49,380,722 on March 16, 2004.

         On March 16, 2004, 28,868,780 shares of SLS International, Inc. common
stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None.

         Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]

<PAGE>
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                         PAGE
PART I                                                                                                   ----
<S>               <C>                                                                                    <C>
Item 1.           Business...........................................................................      1
Item 2.           Properties.........................................................................     14
Item 3.           Legal Proceedings..................................................................     15
Item 4.           Submission of Matters to a Vote of Security Holders................................     15

PART II

Item 5.            Market for Registrant's Common Equity and Related Stockholder Matters........          15
Item 6.            Management's Discussion and Analysis of Financial Condition and Results of
                              Operations.............................................................     16
Item 7.            Financial Statements..............................................................     21
Item 8.            Changes in and Disagreements with Accountants on Accounting and Financial
                   Disclosure........................................................................     21
Item 8A.           Controls and Procedures...........................................................     21

PART III

Item 9.            Directors, Executive Officers, Promoters and Control Persons; Compliance with
                   Section 16(a) of the Exchange Act.................................................     22
Item 10.           Executive Compensation............................................................     23
Item 11.           Security Ownership of Certain Beneficial Owners and Management and Related
                   Stockholder Matters...............................................................     24
Item 12.           Certain Relationships and Related Transactions....................................     27
Item 13.           Exhibits and Reports on Form 8-K..................................................     27
Item 14.           Principal Accountant Fees and Services............................................     32

SIGNATURES...........................................................................................     34

FINANCIAL STATEMENTS TABLE OF CONTENTS...............................................................    F-1
</TABLE>

<PAGE>
                                     PART I

ITEM 1.  BUSINESS.
         --------

         We manufacture premium-quality loudspeakers and sell them through our
dealer networks. The speakers use our proprietary ribbon-driver technology and
are generally recognized in the industry as high-quality systems. We sell a
Professional Line of loudspeakers, a Commercial Line of loudspeakers, Home
Theatre systems, a line for recording and broadcast studios, a line for
contractor installations and touring companies, and a line of in-wall,
in-ceiling and outdoor loudspeakers.

         From the early 1970's through 1999 we derived substantially all of our
revenue from marketing, renting, selling and installing sound and lighting
systems under the name Sound and Lighting Specialist Inc. In June 1999, due to
the favorable customer acceptance of our custom-designed loudspeaker systems, we
ceased these historical operations and began focusing all efforts towards
becoming a loudspeaker manufacturer and selling to dealers and contractors on a
wholesale basis. As a result, we have been essentially in a development stage,
as we are bringing to market products that we introduced in 2000 and 2001 and
designing and bringing to market additional products.

         In June 2000, we asked dealers and distributors to sell our
Professional Line of products. These dealers and distributors started to form
our current network of approximately 50 dealers and 7 foreign distributors and
we began shipping to them. However, most of the Professional Line required new
ribbon drivers that we completed and implemented into the product line in early
2001.

         In September 2000, we introduced our Home Theatre systems, and sales
for those systems began immediately. From September through December 2000, we
added 20 new Home Theatre dealers in the US and began marketing efforts to
establish distributors and dealers outside the US.

         In June 2001, we introduced a Commercial Line of loudspeakers that use
our PRD500 Ribbon Driver and, in September 2001, we finished the development of
our PRD1000 Ribbon Driver and began implementing it into our Professional Line.
Our PRD drivers, which we manufacture, upgraded the previous drivers that we
purchased from third-party manufacturers; and our cost is approximately
one-sixth of the price that we had been paying for the previous drivers.

         SLS International, Inc. was formed on July 25, 2000 and had no previous
operations. On the same date, this corporation merged with Sound and Lighting
Specialist Inc., its sole shareholder, and SLS International, Inc. was the
surviving corporation. The information in this section should be read together
with the financial statements, the accompanying notes to the financial
statements and other sections included in this report.

RECENT EVENTS

         In March 2004, we completed a merger of Evenstar, Inc. into a newly
formed, wholly owned subsidiary. As a result of the merger, we now own, through
the subsidiary, certain technologies and proprietary rights, including those
embodied in one issued patent and one patent application. The technologies
consist of digital amplification technologies that we intend to use in our
loudspeakers and in stereo amplifiers in a product line complementary to our
loudspeakers. We intend to sell these products through our current distribution


                                       1
<PAGE>

channels, as well as through relationships that we expect to develop with mass
merchandisers and real estate developers. In exchange for such technologies, we
paid $300,000 in cash and issued 300,000 shares of our common stock to the
seller. Simultaneously with the acquisition, we hired Joel Butler as director of
our electronics division.

DEVELOPMENT

         Initially, we engaged in the direct sale and installation of sound
systems for various customers and rented lighting and sound equipment. The
business evolved into the business of designing cabinets for loudspeaker systems
for sale and installation. We manufactured the cabinets and purchased the
components, which consisted of compression drivers and woofers from independent
manufacturers, and sold and installed the systems for our customers. The
compression drivers make the high frequency or treble sounds and the woofers
make the low frequency or bass sounds. During 1994, we expanded our line of
loudspeaker systems to include speakers that used ribbon drivers instead of
compression drivers. At that time, we purchased the ribbon drivers from an
independent manufacturer.

         As we developed our ribbon driver line of loudspeakers we relied on our
Tef 20 computer acoustic measurement system to analyze and measure sound waves.
This system is the industry standard for loudspeaker designing and is used by
most of the major loudspeaker manufacturers in the design and manufacture of
loudspeaker systems. Our Tef 20 system indicated that the ribbon driver systems
that we were designing were superior in several ways to the compression driver
systems that we previously used. The ribbon driver system that we were designing
had a smoother frequency response. The level of mid-range sound and treble sound
that the ribbon driver systems were producing was more even and therefore the
loudspeaker reproduced whatever sound it received in a more natural manner.
Also, the ribbon driver did not produce the same level of distortion when played
at higher frequency levels, as compared to the compression driver. This resulted
in a positive reaction from our customers to the quality of sound, and as a
result we decided to change our overall strategy. We determined to focus our
efforts solely on the manufacture and sale of lines of ribbon driver speaker
systems. We sell our speaker systems in six product lines:

         o        The Professional Contractor Speaker System, a more expensive
                  "professional" line
         o        The Universal Series Speaker System, a less expensive
                  "commercial" line
         o        The Home Theatre Speaker Systems
         o        The Studio Series, for recording and broadcast studios
         o        The Ribbon Line Array (RLA) Series, for contractor
                  installations and touring companies
         o        The Design Series, consisting of in-wall, in-ceiling and
                  outdoor speakers for home theater and commercial installations

         The market for the ribbon driver product line is new and growing. Our
future success is uncertain because the loudspeaker market is experiencing rapid
technological advances, changing customer needs and evolving industry standards.

                                       2
<PAGE>

         To realize our expectations regarding our operating results, we will
depend on:

         o        Market acceptance of our ribbon driver products;
         o        Our ability to compete in quality, price and customer service
                  for our products;
         o        Our ability to develop, in a timely manner, new products and
                  services that keep pace with developments in technology;
         o        Our ability to meet changing customer requirements; and
         o        Our ability to enhance our current products and services and
                  deliver them efficiently through appropriate distribution
                  channels.

TECHNOLOGY

         The function of loudspeakers is to increase the volume of sound in
order to enable the sound to be heard by many people occupying a large area. For
many years, the loudspeaker industry used certain types of components to
increase the volume of sound. The technology originally permitted only the types
of components that required low electrical power in order to achieve high volume
sound. In the past, loudspeakers consisted in part of a component called the
compression driver. This device generally is used to reproduce the mid-range and
high frequencies of sound. Early compression drivers consisted of a diaphragm
made of a linen-based manmade resin material that is enclosed in a chamber. This
diaphragm was generally formed as a partial sphere, similar to a ball that has
been cut in half. The edges of the diaphragm were then wound many times with a
fine electrical wire called a voice coil. Electrical current from an amplifier
is sent through the wire and the diaphragm vibrates to produce the sound wave.
However, in the compression driver, the diaphragm is enclosed in a chamber with
the sound exiting out of a relatively small hole that increases the velocity of
the sound. This is similar to forcing air or water through a small hole to
increase its velocity. The disadvantage of the compression driver is that before
the sound waves are forced through the small hole they are first bounced around
inside of the chamber and become distorted and tend to produce a certain amount
of listening fatigue for audiences. Today the compression drivers use a
diaphragm made from aluminum and titanium and can produce the same high volume
but with higher frequency sounds. Although today's compression drivers are
superior to those of the past due to the new materials, the negative aspects
still exist to a degree because of the nature of the design of the compression
driver.

         Originally the diaphragm of the ribbon driver consisted of a material
made from mylar plastic. This plastic component produced a better quality sound
but was not able to handle the amount of electrical current needed to produce a
high level of sound. This caused the component to melt and thereby cease to
function. In addition, the ribbon drivers required relatively large, cumbersome
and heavy magnet assemblies using ceramic magnets. Over the years the ribbon
driver was developed using higher-powered magnets and materials that could
withstand higher temperatures.

         The ribbon driver works in a different manner than the compression
driver. The diaphragm of the ribbon driver is a flat piece of mylar plastic or
in the case of SLS ribbon drivers, a high temperature Kapton plastic. These
materials are considerably thinner and lighter than the linen or even the
aluminum or titanium diaphragms of the compression drivers. The ribbon diaphragm
is laminated on one side with a thin coating of aluminum. This aluminum is then
chemically etched to leave wire-like traces of aluminum that act as a voice
coil, vibrating the diaphragm when current is applied. The diaphragm of the
ribbon driver is not in a chamber and is open and visible to the air. The sound
waves are not restricted and therefore they do not have the distorted properties
of the compression driver. Because the diaphragm of the ribbon driver is so thin
and light it reacts very quickly to the electrical signal and does not introduce
new or resonated sounds created by the material of the diaphragm itself. This
enables the ribbon driver to produce a much purer reproduction of the sound
source without adding any tones of its own.

                                       3
<PAGE>

         In 1994, we purchased several ribbon drivers from a non-affiliated
European company to determine if they could be used in our loudspeaker systems.
Prior to this, we were only using compression drivers. We immediately noticed
the difference in the quality of sound and began to install the ribbon drivers
in some of our own smaller speaker cabinets that did not require high electrical
power. Due to the positive response from our customers we decided to develop a
completely new product line using the ribbon drivers that we purchased from the
European manufacturers.

         In February 2000, we retained Igor Levitsky, an electro-acoustics
engineer to develop a new technology ribbon driver for us. We requested that he
develop two different-sized ribbon drivers and we paid a fixed fee for his work.
We also agreed to pay him a royalty of $2,000 per year for an indefinite period
of time. In April 2001, Mr. Levitsky became our employee and waived his royalty.
Research and development expense was $17,568 in 2001 and $22,095 in 2002. The
cost of such research and development is not borne directly by our customers.

         The ribbon driver that we have developed uses new lightweight
high-powered magnets and plastics that can withstand high temperatures. This
enables the speaker system to have increased power-handling ability and higher
sound volume with substantial reliability and clarity. We have completed
development of our own proprietary ribbon driver, model PRD 500, a 5-inch
version of the ribbon driver. Since 2001, we have directly manufactured models
PRD 500 and PRD 1000, for use in our Home Theatre line, Universal Series
Commercial line, our Studio Series, our Ribbon Line Array (RLA) Series and our
Professional line of loudspeakers. Sale of the Commercial line of loudspeakers
with direct-manufactured ribbon drivers began in June 2001, and sales of the
Professional line of products with direct-manufactured ribbon drivers began in
September 2001. The Studio Series, the RLA Series and the Design Series were all
developed in 2002 and 2003 and use our ribbon drivers or ribbon drivers that we
purchase from B&G Corporation. This direct manufacture of ribbon drivers
substantially reduces our product cost, and it also provides improved
performance for our loudspeaker systems. We also expect to use the PRD 1000 in a
proposed Cinema Line of loudspeakers for movie houses. We are displaying for the
first time at the annual Show West Cinema trade show in March 2004, and through
March 2004, we have several cinema systems specified for installations in
cinemas in the latter part of 2004.

PRODUCTS

         Previously, when we were involved in selling and installing our
products for end-users, our product line consisted of twelve models of
Professional Contractor speaker systems. As a result of the change in operations
to a wholesale business, selling to distributors, we have increased our product
lines. In addition to the models previously manufactured, we added two product
lines, consisting of twelve new models, and increased the number of models we
manufacture under our Professional Contractor System.

         Our Professional Contractor Speaker System line now consists of
eighteen models of speaker systems, each model consisting of a speaker cabinet
and components of woofers that provide the bass sounds and ribbon drivers that
provide the treble sounds. This line, the cabinets of which we generally
manufacture, is usually sold to large contractors and is installed for churches,
theatres, school auditoriums, casinos, night clubs and touring production


                                       4
<PAGE>

companies. Although we now manufacture our own ribbon drivers, the woofers are
manufactured to our specifications by non-affiliated manufacturers.

         Our Commercial line, the Universal Series Speaker System, consists of
lower-cost speakers that are designed to be sold by music stores for orchestras,
disc jockeys and the less expensive commercial market. There are twelve models
of different size, with less expensive components that produce varying sound
levels and area coverage capabilities. These models are equal in quality to, but
do not produce the sound levels of, our Professional Contractor Speaker System
Line.

         We recently developed a new line of loudspeakers for the home theatre
market. We intend to direct a substantial effort to capture a greater share of
the home theatre market. Our Home Theatre Loudspeaker System consists of four
models that use the smallest unit of our Professional Contractor Loudspeaker
System as their basis. We manufacture the cabinetry and the ribbon drivers for
this system, our PRD 500. These systems are designed for the boardroom and for
the home. The home theatre market requires equipment that uses five or more
speakers placed around a room. This configuration provides the listener with
"surround sound" similar to a movie theatre experience. Almost all current
movies are now produced in surround sound, which uses at least five speakers
plus a sub-woofer system.

         Due to the unique design of our ribbon drivers we have developed a new
series of speaker systems for the contractor installation and touring sound
reinforcement markets. These products are part of our new RLA Series. This line
has been receiving high acclaim in the industry and we have received orders for
this product line in many new prestigious installations.

         Our recent efforts in home theater marketing have led us to market and
offer products for the home theater and commercial in-wall and in-ceiling
speaker segment of our industry. These products are called our Design Series and
are being specified in many future installations.

         We have developed two new models of speaker systems for the recording
studio and broadcast markets and have added them to our existing on-studio
speaker that was originally part of our Professional line. We are now
designating these three different speakers as our Studio Series.

         Revenue from our ribbon driver product line is expected to account for
a material portion of our revenue for the foreseeable future. Our financial
performance will depend on market acceptance of our ribbon driver technology and
products. The sound system industry continually introduces technological
developments, frequently announces new products, and has evolving industry
standards and changing customer requirements. As a result, if our ribbon driver
technology and product line do not rapidly achieve sufficient market acceptance,
we may not be able to achieve expected revenues or profits.

         We re-packaged certain models of our Professional Contractor Sound
Systems for the cinema and movie theatre market by simplifying the cabinetry. In
a typical movie house, the speakers are usually not displayed in view of the
public, which allows for simplified cabinetry. The new cabinetry is designed to
be less costly, as are the other components, which we expect to provide our
representatives with a cost advantage in marketing our system to cinema owners.
At present, a total of ten models have been repackaged for this line. They were
introduced to cinema companies by means of personal demonstrations and are being
shown to the entire cinema market in March 2004 at the annual Show West Cinema
trade shows.

                                       5
<PAGE>

         We have developed a new less-expensive 5.1 Home Theater system, which
is now in production. It is in stock and being sold through our existing and new
home theater dealers.

MANUFACTURING AND SOURCING

         We generally design and manufacture our own cabinets for our product
lines, and on occasion contract certain models manufactured by independent,
established, local and other woodcrafters. These manufacturers construct the
cabinetry to our specifications. Our ribbon drivers are either directly
manufactured or purchased from a non-affiliated manufacturer, B&G Corporation.
The principal suppliers of our woofers are Belisle Acoustics, Eminence, PHL and
Seas Speaker Component Manufacturers. The manufacture of our own ribbon drivers
has resulted in a meaningful reduction in costs, and we expect that it will
enable our products to be more competitively priced.

         Our sources of supply of other component sub-parts are all
competitively priced and we have a sufficient number of other sources of supply
available to us should the need arise for additional components. If a
termination of an existing relationship with any current supplier occurs we do
not expect to have any difficulty in replacing that source. We presently
purchase most of the woofers used in our systems from a non-affiliated Canadian
company that produces them according to our specifications.

SALES AND MARKETING

         Domestic. In addition to advertising in trade journals and attending
industry conventions for promotion and sale of our products, we have established
a network of distributors to cover the territorial United States. Currently, we
have approximately 100 dealers for our Professional line, 6 distributors for our
Professional and Commercial lines, 20 dealers for our Home Theatre line, 2
domestic and 6 international distributors for our Home Theatre line, and 100
dealers for our Commercial line. These outlets sell our products in
approximately three-quarters of the United States and six foreign countries. The
dealer agreement may be terminated without cause by either party on 30 days
notice.

         We train the sales representatives to enable them to deal more easily
with customer questions. As manufacturers, we are always available to respond to
inquiries of customers and potential customers, if and when required. Although
we are small in comparison to the industry leaders, we are seeking to become
established in a niche market consisting of commercial and residential customers
who are more interested in a truer reproduction of sound than in a brand name.

         In June 1999, we ceased selling our loudspeaker systems directly to
end-users. Up to that time, we sold only the Professional Contractor Loudspeaker
Systems to end-user customers, primarily churches, schools, nightclubs and
similar establishments. These systems contained ribbon drivers manufactured by
others. From June 1999 through June 2000, we converted to a manufacturing
company and developed more products. These additional products consisted of the
Commercial line of Universal Series Loudspeaker systems and Home Theatre speaker
systems. In 2003, we sold 258 units of our Universal Series systems, 285 units
of our Home Theatre Systems, 130 units of our Professional Contractor systems,
75 units of our Studio Series systems, 415 units of our RLA Series sytems, and
137 units of our Design Series systems.

         We will continue to design and manufacture the same products as
previously sold to end-users for sale through our dealer network. The Universal


                                       6
<PAGE>

Series and Home Theatre lines, part of our Studio Series line, and some models
of our RLA Series line contains our ribbon driver model PRD 500. The
Professional Contractor Loudspeaker line and other models of the RLA Series line
contains our ribbon driver model PRD 1000.

         International. We are also engaged in marketing and promotion
internationally. Our international business involves a number of risks,
including:

         o        foreign currency exchange fluctuations;
         o        political and economic instability;
         o        difficulty in managing distributors or sales representatives;
         o        tariffs and other trade barriers; and
         o        complex foreign laws and treaties including employment laws.

         Because our sales are in US currency, foreign currency exchange
fluctuations could materially affect us negatively. A decrease in the value of
foreign currencies as they relate to the U.S. dollar could make the pricing of
our products more expensive than products of our foreign competitors that are
priced in foreign currencies. Because of the fluctuating exchange rates and our
involvement with a number of currencies, we are unable to predict future
operating results.

         In January 1999, the new "Euro" currency was introduced in European
countries that are part of the European Monetary Union, or EMU. During 2002, all
EMU countries replaced their national currencies with the Euro. Because it is
too early to determine the effect the Euro will have on the marketplace, we
cannot determine the effect this may have on our business.

         In the future we expect to make significant investments in our
operations, particularly to support technological developments and sales
activities. As a result, operating expenses are expected to continue to
increase. As we develop and introduce new products and expand into new markets
such as international, direct and OEM markets, we intend to make such
investments on a continuing basis, primarily from revenues generated from
operations and from funds raised from sales of our stock. If our net sales do
not increase along with capital requirements or other investments, we are likely
to continue to incur net losses and our financial condition could be materially
and adversely affected. Since 1998 we have not been profitable due mostly to the
shift in our operating focus, and we cannot be certain that we will achieve or
sustain profitability in the future.

COMPETITION

         Our main competitors are JBL Professional, a division of Harmon
International, Inc.; Eastern Acoustics Works, Inc.; Meyer Sound, Inc.;
Turbosound, Inc.; and Renkus-Heinz, Inc. All of these companies have
substantially greater assets and financial resources than we do. Most of the
competitors compete in both the higher priced, more sophisticated line of
loudspeaker systems, which are similar to our Professional Contractor Speaker
Systems, and the lower priced, less sophisticated line of loudspeaker systems,
similar to our Universal Series Speaker Systems. Meyer Sound and Renkus-Heinz
are engaged only in the more expensive speaker systems. All of these competitors
presently use the compression driver component in their sound systems. Although
our ribbon driver products are new, the nature of the market for our loudspeaker
products is highly competitive and sensitive to the introduction of new
products. As a result, we may experience increasing competition in the future.

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<PAGE>

         Our success will depend, in part, upon our ability to increase sales in
our targeted markets. We may not be able to compete successfully with our
competitors and the pressures from competitors may have a material adverse
effect on us. Our success will depend in large part upon our ability to increase
our share of our target market and to sell additional products to existing
customers. However, future competition could result in price reductions, reduced
margins or decreased sales of our products.

         We currently compete primarily with the internal design efforts of
larger and more established companies that have larger technical staffs, more
established and larger marketing and sales organizations and significantly
greater financial resources than we have. Such competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements. They are able to devote greater resources to the development, sale
and promotion of their products than we are able to devote. They may develop
products that are superior in certain respects to our products or may develop
products that achieve greater market acceptance.

PROPRIETARY TECHNOLOGY

         We are the owners of the proprietary ribbon driver technology for our
models PRD 500 and PRD 1000. We have no patents on this technology. However, we
have filed a Disclosure Statement with the US Patent and Trademark Office as
evidence of our conception of the invention, and we filed a patent application
in September 2002. Although we have filed for a patent we cannot be certain that
a patent will be granted, or that it will give us an advantage over our
competitors.

         The laws of some foreign countries do not protect or enforce
proprietary rights to the same extent as do the laws of the United States. Also,
our domestic and international competitors may develop other technology that
produces results similar to our technology. We expect that some loudspeaker
products may be subject to patent infringement claims as the number of products
and competitors in our industry grows. As a result, third parties may assert
patent infringement claims against us in the future, and such claims may not be
resolved in our favor. Any such claims, with or without merit, could be
time-consuming and may result in costly litigation. Such claims may also require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if they become necessary, may not be available on terms that are
favorable to us, if at all. In addition, we may be forced to commence litigation
in the future to protect our trade secrets or proprietary rights, or to
determine the validity and extent of the proprietary rights of others. Such
possible litigation could result in substantial costs and diversion of our
energy and resources.

EMPLOYEES

         We have a total of 19 employees, one of which is executive, three are
administrative, one is a marketing director, one is in technical communications,
one is a sales manager, two are in engineering and ten are technical and
assembly personnel. In the past, we have employed additional temporary and
part-time employees to meet production obligations and fill orders. There is
presently no labor union contract between any union and us. We do not anticipate
our employees will seek to form or join a union for the foreseeable future.

                                       8
<PAGE>

BUSINESS STRATEGY

         As a result of our experience, we have determined that maintaining
consistent contact with distributors, customers and others in the industry and
continued marketing through conventions and trade magazines will produce
additional business. We have determined that marketing our products by the
distributor/sales representative network is best suited to generate revenue. Our
distributors are expected to be our primary source of business in coming years.
In addition, the sales representatives will enable us to monitor the
effectiveness of our marketing program. Now that we have the ability to
manufacture our own ribbon drivers, we will derive savings from the cost of
purchasing compression drivers and ribbon drivers from third parties. Both the
cost savings and the quality of the lower distortion, as demonstrated by our Tef
20 analysis device, are expected to enable us to establish a place in the home,
commercial and professional loudspeaker markets.

         We have recently re-focused our business on the development and
application of our ribbon driver technology. This new business may not be
successful and our future operating performance may not bring about the results
that we are seeking. Our operating results for future periods are subject to all
of the risks and uncertainties which are inherent in the establishment of new
business enterprises, and in particular will depend upon:

         o        market acceptance of our ribbon driver technology;
         o        our success in establishing and expanding the distribution
                  network nationwide and internationally;
         o        our success in establishing ribbon driver products as a retail
                  product line;
         o        our success in attracting a strategic partner;
         o        availability of capital;
         o        our success in attracting and retaining motivated and
                  qualified personnel, particularly in the technical areas; and
         o        our marketing of new products and ribbon driver technology
                  applications.

         Our initial market concentration has been in the area of church
construction and cinema theatre construction. The larger speakers we currently
manufacture have been specifically designed for use in the church and cinema
markets.

         We intend to continue advertising in trade journals and attending
industry conventions to maintain our image as a competitor in the loudspeaker
industry in the U.S. and internationally. We are seeking to derive profits and
competitiveness by sales through the dealer network of our product line using
our less costly ribbon driver, which we have manufactured since 2001. However,
we cannot assure investors or predict profits from distributor sales or any
other business activity.

         At the appropriate time, we intend to investigate possible strategic
alliances with key industry participants to strengthen our image, our product
components and our distribution pattern. We cannot be certain that a future
alliance opportunity will present itself; or, if an opportunity is presented,
that it will result in a profitable working relationship. It is likely that in
some future financial quarter or quarters, our operating results will be below
the expectations of securities analysts and investors. If a shortfall in revenue
occurs, the market price for our common stock may decline significantly. The
factors that may cause our quarterly operating results to fall short of
expectations include:

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<PAGE>

         o        our ability to develop and market our new ribbon driver
                  loudspeaker products in a timely manner;
         o        the size and timing of customer orders;
         o        seasonality of sales;
         o        availability of capital;
         o        the degree and rate of growth of the markets in which we
                  compete and the accompanying demand for our loudspeaker
                  products;
         o        our suppliers' ability to perform under their contracts with
                  us.

         Many of these factors are beyond our control. For these reasons,
period-to-period comparisons of our financial results may not necessarily assist
in forecasting our future performance.

RISK FACTORS

         An investment in our common stock involves various risks, including
those described in the risk factors below. You should carefully consider these
risk factors, together with all of the other information included in this
report, before investing in our common stock. If any of the following risks, or
any other risks not described below, develop into actual events, then our
business, financial condition, results of operations, or prospects could be
materially adversely affected, the market price of our common stock could
decline further and you could lose all or part of your investment in our common
stock.

WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE IF WE DO NOT
ACHIEVE SUFFICIENT REVENUE TO ABSORB RECENT AND PLANNED EXPENDITURES.

         We have experienced significant operating losses since investing in the
development of ribbon driver technology in 1998 and, through December 31, 2003,
have an accumulated retained deficit of approximately $10,843,561. If we do not
achieve continued revenue growth sufficient to absorb our recent and planned
expenditures, we could experience additional losses in future periods. These
losses or fluctuations in our operating results could cause the market value of
our common stock to decline.

WE WILL DEPEND ON ADDITIONAL CAPITAL.

         Our ability to implement our strategy and expand our operations largely
depends on our access to capital. To implement our long-term strategy, we plan
to make ongoing expenditures for the expansion and improvement of our product
line and the promotion of our products. To date, we have financed our operations
primarily through sales of equity and the issuance of notes. We will need to
issue additional equity or other securities to obtain the financing required to
continue our operations. However, additional capital may not be available on
terms acceptable to us. Our failure to obtain sufficient additional capital
could curtail or alter our growth strategy or delay needed capital expenditures.

OUR DEPENDENCE UPON THIRD-PARTY DEALERS FOR SALES MAKES US VULNERABLE TO THE
EFFORTS OF OTHERS WHICH ARE BEYOND OUR CONTROL.

         Our distributors may not continue their current relationships with us
and they may give higher priority to the sale of our competitors' products. In
addition, to be effective, distributors must devote significant technical,
marketing and sales resources to an often lengthy sales cycle. Our current and
future distributors may not devote sufficient resources to market our products
effectively and economic or industry conditions may adversely affect their


                                       10
<PAGE>

ability to market or sell for us. A reduction in sales efforts or a
discontinuation of distribution of our products by any distributor could lead to
reduced sales and greater net losses.

WE MAY NOT GAIN MARKET ACCEPTANCE OF OUR RIBBON DRIVER TECHNOLOGY.

         We believe that revenues from our ribbon driver product line will
account for a material portion of our revenue for the foreseeable future. Our
future financial performance will depend on the market acceptance of our ribbon
driver technology and products. The market for sound systems is sustained by
ongoing technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
To date, we have had limited sales of products containing our new technology
ribbon drivers. If our ribbon driver technology and product line do not gain
sufficient positive market acceptance, we may not achieve anticipated revenue,
profits or continued viability.

IN THE LOUDSPEAKER MARKET, WE ARE SUBJECT TO INTENSE COMPETITION.

         Although our ribbon driver loudspeaker products are relatively new and
emerging, the markets for loudspeaker products are extremely competitive and we
expect such competition to increase. The market for sound enhancement products
in general is intensely competitive and sensitive to new product introductions
or enhancements and marketing efforts by our competitors. We expect to
experience increasing levels of competition in the future. Although we have
attempted to design our loudspeaker systems to compete favorably with
competitive products, we may not be able to establish and maintain our
competitive position against current or potential competitors. Aggressive
competition could cause us to have sales and profitability below expectations.

IF WE ARE UNABLE TO HIRE OR RETAIN QUALIFIED AND SKILLED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS OR SUCCESSFULLY MANAGE OUR BUSINESS.

         We believe our success will depend in large part upon our ability to
identify, attract and retain highly skilled managerial, engineering, sales and
marketing, finance and operations personnel. However, we may not be successful
in identifying, attracting and retaining such personnel. Our success also
depends to a great degree upon the continued contributions of our key
management, engineering, sales and marketing, finance and manufacturing
personnel, many of whom would be difficult to replace. In particular, we believe
that our future success depends on John Gott, Chief Executive Officer. We
presently do not maintain key person life insurance on Mr. Gott, and we
presently do not have an employment contract with him. If we experience the loss
of the services of any of our key personnel, we may be unable to identify,
attract or retain qualified personnel in the future. This could make it
difficult for us to manage our business and meet key objectives, or achieve or
sustain profits.

OUR RECURRING LOSSES AND DEPENDENCE UPON ADDITIONAL FINANCING HAVE CAUSED OUR
AUDITORS TO ISSUE A STATEMENT INDICATING SUBSTANTIAL DOUBT AS TO OUR ABILITY TO
CONTINUE AS A GOING CONCERN.

         The accountants' audit report on our financial statements for the year
ended December 31, 2003 included a statement that, because of recurring losses
and our dependency on the sale of securities or obtaining debt financing, there
was a substantial doubt about our ability to continue as a going concern. If we


                                       11
<PAGE>

are unable to raise additional financing to cover operating expenses and derive
additional revenue from sales, we may no longer be a viable business.

SINCE OUR COMMON STOCK IS THINLY TRADED, IT CAN BE SUBJECT TO EXTREME RISES OR
DECLINES IN PRICE, AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE
PRICE YOU PAID.

         You may have difficulty reselling shares of our common stock. You may
not be able to resell your shares at or above the price you paid, or at a fair
market value. The stock markets often experience significant price and volume
changes that are not related to the operating performance of individual
companies. These broad market changes may cause the market price of our common
stock to decline regardless of how well we perform as a company.

OUR PATENT APPLICATION MAY NOT BE ISSUED AND EVEN IF IT IS ISSUED, WE STILL MAY
NOT BE ABLE TO ADEQUATELY PROTECT THE PATENT OR OUR OTHER INTELLECTUAL PROPERTY.

         In September 2002, we filed a U.S. patent application on our
proprietary ribbon driver technology. Our success will depend in significant
part on our ability to obtain, preserve and defend U.S. patent protection for
this technology. The patent may not be issued from the patent application. The
issuance of a patent is not conclusive as to its validity or enforceability and,
if a patent is issued, it is uncertain how much protection, if any, will be
given to our patent if we attempt to enforce it. Litigation, which could be
costly and time consuming, may be necessary to enforce any patent issued in the
future or to determine the scope and validity of the proprietary rights of third
parties. A competitor may successfully challenge the validity or enforceability
of our patent or challenge the extent of the patent's coverage. If the outcome
of litigation is adverse to us, third parties may be able to use our patented
technology without payment to us. Even if we are successful in defending such
litigation, the cost of litigation to uphold the patent can be substantial.

         It is possible that competitors may infringe our patents or
successfully avoid them through design innovation. To stop these activities we
may need to file a lawsuit. These lawsuits are expensive and would consume time
and other resources. In addition, there is a risk that a court would decide that
our patent is not valid, that we do not have the right to stop the other party
from using the inventions, or that the competitor's activities do not infringe
our patent.

         Our competitive position is also dependent upon unpatented technology
and trade secrets, which may be difficult to protect. Others may independently
develop substantially equivalent proprietary information and techniques that
would legally circumvent our intellectual property rights. Currently, we have
not registered any potential trademarks and we may not be able to obtain
registration for such trademarks.

THE USE OF OUR TECHNOLOGIES COULD POTENTIALLY CONFLICT WITH THE RIGHTS OF
OTHERS.

         Our competitors, or others, may have or may acquire patent rights that
they could enforce against us. If our products conflict with patent rights of
others, third parties could bring legal actions against us or our suppliers or
customers, claiming damages and seeking to enjoin manufacturing and marketing of
the affected products. If these legal actions are successful, in addition to any
potential liability for damages, we could be required to alter our products or
obtain a license in order to continue to manufacture or market the affected
products. We may not prevail in any legal action and a required license under


                                       12
<PAGE>

the patent may not be available on acceptable terms or at all. The cost to us of
any litigation or other proceeding relating to intellectual property rights,
even if resolved in our favor, could be substantial.

WE MUST EXPAND OUR OPERATIONS TO COMMERCIALIZE OUR PRODUCTS, WHICH WE MAY NOT BE
ABLE TO DO.

         We will need to expand and effectively manage our operations and
facilities to successfully pursue and complete our commercialization efforts. We
will need to add personnel, including management, and expand our capabilities,
which may strain our existing managerial, operational, financial and other
resources. To compete effectively and manage our growth, we must train, manage
and motivate a substantially larger employee base, accurately forecast demand
for our products and implement operational, financial and management information
systems. In the event that we fail to expand or manage our growth effectively or
if we cannot recruit qualified employees, our commercialization efforts could be
curtailed or delayed.

WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, AND WE MAY NOT BE ABLE TO
INTEGRATE AND OPERATE THE ACQUISITIONS.

         From time to time, we have considered the acquisition of other
businesses or other technologies, and we continue to consider such acquisitions
as opportunities arise. As discussed above under "Recent Events," we acquired
Evenstar, Inc. in March 2004. Some of these businesses and technologies,
including Evenstar, are directly related to our business and others are not. If
we make any such acquisitions, we may not be able to efficiently combine our
operations with those of the businesses or technologies we acquire without
encountering difficulties. These difficulties could result from a variety of
issues, including incompatible operating practices, corporate cultures, product
lines, or technologies. As a result, we may have difficulties in integrating,
managing and operating the acquired businesses and technologies.

FUTURE SALES OF COMMON STOCK COULD DEPRESS THE PRICE OF OUR COMMON STOCK.

         Future sales of substantial amounts of our common stock pursuant to
Rule 144 under the Securities Act of 1933 or otherwise could have a material
adverse impact on the market price for the common stock at the time. On March
16, 2004, there were approximately 16,000,000 outstanding shares of our common
stock held by stockholders that are deemed "restricted securities" as defined by
Rule 144 under the Securities Act. Under certain circumstances, these shares may
be sold without registration pursuant to the provisions of Rule 144. In general,
under Rule 144, a person (or persons whose shares are aggregated) who has held
the stock for one year may, under certain circumstances, sell within any
three-month period a number of restricted securities which does not exceed the
greater of 1% of the shares outstanding or the average weekly trading volume
during the four calendar weeks preceding the notice of sale required by Rule
144. In addition, Rule 144 permits, under certain circumstances, the sale of
restricted securities without any quantity limitations by a non-affiliate who
has held the security for two years. Any sales of shares by stockholders
pursuant to Rule 144 may have a depressive effect on the price of our common
stock.

                                       13
<PAGE>

WE MAY HAVE LIABILITY FOR PRIOR ISSUANCES OF OUR STOCK.

         Since May 1, 2002, warrant holders exercised 2,394,000 Class A Warrants
and 16,600 Class B Warrants for a total of 2,410,600 shares of common stock. The
warrant holders paid an aggregate of $1,246,800 for these exercises. Since May
1, 2002, the registration statement that we filed with the U.S. Securities and
Exchange Commission to register the common stock issuable upon exercise of these
warrants may not have been "current" because the registration statement had not
been amended to include our most recent audited financial statements. As a
result, the former warrant holders may be entitled to demand a rescission of
their previous exercises of common stock. We intend to make a rescission offer,
in the second quarter of 2004, to all warrant holders who exercised warrants
during the period from May 1, 2002 through the date of the rescission offer.
Once made, the rescission offer is expected to remain open for 30 days. The
rescission offer would require us to repurchase the shares of common stock
issued upon exercise of the warrants at their original exercise price, $.50 for
the Class A warrants and $3.00 for the Class B warrants, at each warrant
holder's option. If all warrant holders accepted the rescission offer, we would
be required to pay $1,246,800 plus interest, which amount would be reduced to
the extent of the proceeds from any sales of the underlying common stock by the
former warrant holders. Acceptance of the rescission offer by all former warrant
holders could have a material adverse effect. The current market price is over
the $.50 exercise price of the Class A warrants, and if that remains true, we
would expect no former holders of Class A Warrants to accept the rescission
offer. The current market price is below the $3.00 exercise price of the Class B
warrants. Only 16,600 Class B warrants were exercised during the rescission
offer period, making our potential rescission liability to the former Class B
warrant holders equal to $49,800 plus interest, which amount would be reduced to
the extent of any sales of the underlying common stock by the former warrant
holders.

ITEM 2.  PROPERTIES.
         ----------

         We do not own any real property. We lease and operate in 19,500 square
feet of office and factory space at our current headquarters address from a
nonaffiliated landlord. The lease expires on August 31, 2004. The monthly rental
is presently $4,650. Our facility is divided into four equal 3,000 square foot
sections that are internally connected plus one 7,500 square foot adjoining
section. One of the 3,000 square foot sections is used for cabinet fabrication;
another is used for storage of completed cabinets and component storage; the
third is used for assembly and shipping; and the fourth is used for engineering
and administration. The 7,500 square foot section is used for inventory,
packaging and trade show materials storage. These facilities are suitable for
producing in excess of 300 finished speaker cabinets per week and for the
production of up to 1,500 ribbon drivers per month. Although we have no plans to
relocate our facility, should the occasion arise to do so, there is ample
factory and office space available at other locations in the region at similar
or competitive rates. In addition, we have three subcontractor cabinet shops
that add to our production capabilities. These companies are highly automated
and can supply up to a total of 2000 cabinets per week on scheduled notice.

         In July 2003, we agreed to lease an additional 7,500 square feet of
space for $2,000 per month. We have built-out this space, and are using it for
(a) additional inventory space for the components and cabinets needed for
planned increases in production, (b) additional engineering testing space to
perform critical tests and produce data for sound system designers to provide
specifications for products, and (c) on-site product demonstrations. We
anticipate that these two leased properties, totaling 27,000 square feet at an
aggregate monthly rental of $6,650, will be sufficient to meet our needs for
projected sales levels for the next two to three years.

                                       14
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.
         -----------------

         On December 24, 2002, 21-Day Capital Corporation filed a complaint
against us in the Superior Court of California, County of Los Angeles. 21-Day
Capital Corporation is the assignee of certain rights of Muir, Crane & Co. The
complaint alleges breach of contract and seeks the payment of $48,750.67, plus
interest, attorneys' fees and costs, and other relief as the court deems proper.
We filed an answer on February 6, 2003 denying the allegations contained in the
complaint and asserting affirmative defenses. In February 2004, we settled this
claim and agreed to pay $35,000 in such settlement.

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

         This item is inapplicable, as no matters were submitted to a vote of
our security holders during the quarter ended December 31, 2003.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
         ---------------------------------------------------------------------

         Our common stock began trading on the Over-the-Counter Bulletin Board
under the symbol "SITI.OB" on June 27, 2001. The table below sets forth, by
quarter, the sales information for our common stock as reported on the
Over-the-Counter Bulletin Board in our last two fiscal years. This information
reflects inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.

                                           SALE PRICES
                                       ---------------------
                                       HIGH             LOW
2002:
First quarter                          0.84             0.36
Second quarter                         0.84             0.20
Third quarter                          0.59             0.23
Fourth quarter                         0.51             0.16

2003:
First quarter                          0.45             0.20
Second quarter                         0.60             0.19
Third quarter                          1.85             0.75
Fourth quarter                         3.92             1.37

         On March 16, 2004, there were approximately 118 holders of record of
our common stock, based on information furnished by our transfer agent. On March
16, 2004, the closing price of our common stock on the Over-the-Counter Bulletin
Board was $2.65 per share. We urge you to obtain current market quotations for
shares of our common stock.

                                       15
<PAGE>

         We have not paid any cash dividends in our past two fiscal years and do
not anticipate paying cash dividends in the foreseeable future. We intend to
retain future earnings to fund the development and growth of our business. Any
payment of dividends in the future will be at the discretion of our board of
directors and will be dependent upon our earnings, financial condition, capital
requirements and other factors deemed relevant by our board of directors.

SALES OF UNREGISTERED SECURITIES DURING THE 2003 FOURTH QUARTER

         In the fourth quarter of 2003, we issued 362,600 shares of our common
stock upon exercise of our outstanding Class A Warrants and Class B Warrants for
aggregate proceeds of $222,800. The shares of common stock were issued pursuant
to a registration statement declared effective by the U.S. Securities and
Exchange Commission in 2001, registration statement number 333-43770. However,
since May 1, 2002, such registration statement may not have been "current"
because the registration statement had not been amended to include our most
recent audited financial statements. As a result, the former warrant holders may
be entitled to demand a rescission of their previous exercises of common stock.
We intend to make a rescission offer, in the second quarter of 2004, to all
warrant holders who exercised warrants during the period from May 1, 2002
through the date of the rescission offer. Once made, the rescission offer is
expected to remain open for 30 days. The rescission offer would require us to
repurchase the shares of common stock issued upon exercise of the warrants at
their original exercise price, $.50 for the Class A warrants and $3.00 for the
Class B warrants, at each warrant holder's option. The current market price is
over the $.50 exercise price of the Class A warrants, and if that remains true,
we would expect no former holders of Class A Warrants to accept the rescission
offer. The current market price is below the $3.00 exercise price of the Class B
warrants. Only 16,600 Class B warrants were exercised during the rescission
offer period, making our potential rescission liability to the former Class B
warrant holders equal to $49,800 plus interest, which amount would be reduced to
the extent of any sales of the underlying common stock by the former warrant
holders.

         We also issued an aggregate of 420,452 shares of common stock under
consulting agreements entered into during the quarter ended December 31, 2003.
The issuances were made in reliance on Section 4(2) of the Securities Act of
1933, as amended.

         The net proceeds from these sales and issuances in the fourth quarter
of 2003 were used for working capital purposes. We did not use any registered
securities broker-dealers in connection with any sales of stock. All of the
foregoing uses of proceeds were direct or indirect payments to nonaffiliates.

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

OVERVIEW

         We manufacture premium-quality loudspeakers and sell them through our
dealer networks. The speakers use our proprietary ribbon-driver technology and
are generally recognized in the industry as high-quality systems. We sell a
Professional Line of loudspeakers, a Commercial Line of loudspeakers, Home
Theatre systems, a line for recording and broadcast studios, a line for
contractor installations and touring companies, and a line of in-wall,
in-ceiling and outdoor loudspeakers.

                                       16
<PAGE>

         From the early 1970's through 1999 we derived substantially all of our
revenue from marketing, renting, selling and installing sound and lighting
systems. In June 1999, due to the favorable customer acceptance of our
custom-designed loudspeaker systems, we ceased these historical operations and
began focusing all efforts towards becoming a loudspeaker manufacturer and
selling to dealers and contractors on a wholesale basis. As a result, we have
been essentially in a development stage, as we are bringing to market products
that we introduced in 2000 and 2001 and designing and bringing to market
additional products.

         In June 2000, we asked dealers and distributors to sell our
Professional Line of products. These dealers and distributors started to form
our current network of approximately 50 dealers and 7 foreign distributors and
we began shipping to them. However, most of the Professional Line required new
ribbon drivers that we completed and implemented into the product line in early
2001.

         In September 2000, we introduced our Home Theatre systems, and sales
for those systems began immediately. From September through December 2000, we
added 20 new Home Theatre dealers in the US and began marketing efforts to
establish distributors and dealers outside the US.

         In June 2001, we introduced a Commercial Line of loudspeakers that
utilize our PRD500 Ribbon Driver and, in September 2001, we finished the
development of our PRD1000 Ribbon Driver and began implementing it into our
Professional Line. Our PRD drivers, which we manufacture, upgraded the previous
drivers that we purchased from third-party manufacturers; and our cost is
approximately one-sixth of the price that we had been paying for the previous
drivers.

         SLS International, Inc. was formed on July 25, 2000 and had no previous
operations. On the same date, this corporation merged with Sound and Lighting
Specialist Inc., its sole shareholder, and SLS International, Inc. was the
surviving corporation. All of the financial information reported for periods
prior to the merger are the results of operations of Sound and Lighting
Specialist, Inc. All of the operating activity reported for periods after the
merger are the results of operations of SLS International, Inc. The information
in this section should be read together with the financial statements, the
accompanying notes to the financial statements and other sections included in
this report.

RESULTS OF OPERATIONS

         Year ended December 31, 2003 as compared to the year ended December 31,
2002. For the year ended December 31, 2003, revenue increased to $968,245 from
$790,582 in 2002, as a result of the further roll-out of our product line and
customer acceptance of our products. Gross profit percentage increased to 38% in
2003 compared to 32% in 2002, primarily as a result of decreased cost of goods
sold for larger quantity purchases, higher margins for certain new products and
decreased cost of goods sold from partial outsourcing of certain products.

         General and administrative expenses for 2003 increased to $4,492,238
from $2,468,565 in 2002, primarily as a result of increased expenses for
consulting and investor relation services. In 2003, we spent an aggregate of
$3,104,153 for such services, $1,799,248 of which was non-cash charges related
to the issuance of stock or stock options for such services. In 2002, we spent
an aggregate of $1,303,770 for such services, $1,074,229 of which was non-cash
charges related to the issuance of stock for such services. Services rendered
included promotional services, assistance with product promotion and
distribution, business development services, marketing services, merger and
acquisition services, public relations, investor relations, and capital raising.
Excluding such consulting and investor relations services, our general and


                                       17
<PAGE>

administrative expenses increased by $223,290 in 2003. This increase is
attributed to increases in advertising expenses, accounting and legal expenses,
property lease expenses, equipment lease expenses, and additional employees,
partially offset by a decrease in bad debt expense.

         In 2003, primarily as a result of the increased general and
administrative expense, which was partially offset by increased revenue and an
improved gross profit percentage, we reported an increased net loss of
$3,979,341 as compared to a net loss of $2,242,325 in 2002.

         Other income(expense) increased to $145,864 in other income in 2003,
compared to other expense of $27,099 in 2002, due primarily to write-offs of
accounts payable, a change in reserves for doubtful accounts, and income
received from accounts receivable that were previously written off.

         Year ended December 31, 2002 as compared to the year ended December 31,
2001. For the year ended December 31, 2002, revenue increased to $790,582 from
$353,797 in 2001, as a result of the further roll-out of our product line and
customer acceptance of our products. Gross profit percentage increased to 32% in
2002 compared to 19% in 2001, primarily as a result of our conversion to
in-house manufacturing of our ribbon drivers from our previous outsourcing of
such components. In 2002, despite the increased revenue and improved gross
profit percentage, we reported a net loss of $2,242,325 as compared to a net
loss of $1,040,174 in 2001. The greater net loss was primarily the result of
increased general and administrative expenses, as discussed below.

         General and administrative expenses for 2002 increased to $2,468,565
from $1,068,335 in 2001, primarily as a result of the write-off of $203,831 of
bad debt expense (compared to $4,000 in 2001) and $1,074,229 of non-cash
expenses amortized in 2002 reflecting a portion of the fair value of stock and
options issued under consulting agreements entered into during 2001 and 2002. A
total of $1,599,213 in expenses were accrued under these consulting agreements,
and the unamortized portion ($524,984) of such expenses will be amortized in
future periods. Other factors causing the increase in general and administrative
expenses include a new employee handling our development of a transducer, a new
controller for our financial operations, a new national sales manager, increased
trade show participation to promote our products, and cash expenses for
consultants targeted toward increased exposure and relations with top musical
artists. Also, during the 2002 third quarter, we increased the size of our
leased facility, thereby increasing our monthly lease costs, which will increase
our capacity to satisfy the expected growth in revenue. Partially offsetting
these increases was the elimination of legal, accounting, consulting and other
costs incurred as a result of our 2001 public offering.

         Interest expense decreased to $33,306 in 2002 as compared to $46,011 in
2001, due to decreased borrowings.

FINANCIAL CONDITION

         On December 31, 2003, our current assets exceeded current liabilities
by $1,945,227 as compared to December 31, 2002 when our current liabilities
exceeded current assets by $588,486. On December 31, 2003, net assets exceeded
total liabilities by $2,239,489, compared to December 31, 2002 when total
liabilities exceeded net assets on by $562,262. The improvement in working
capital was due primarily to increases in cash resulting from the closing of our
private placement in July 2003, which is further discussed below. We used part
of this cash to increase our inventory, purchase equipment and vehicles, make


                                       18
<PAGE>

leasehold improvements, and reduce accounts payable and notes payable, all of
which resulted in an improved working capital position.

         We have experienced operating losses and negative cash flows from
operating activities in all recent years. The losses have been incurred due to
the development time and costs in bringing our products through engineering and
to the marketplace. In addition we have not paid notes payable and accounts
payable on due dates. The report of our accountants contains an explanatory
paragraph indicating that these factors raise substantial doubt about our
ability to continue as a going concern.

         In 2003 and 2002, we entered into consulting agreements that required
us to issue an aggregate of 3,215,452 shares of common stock, options to
purchase 100,000 shares of Class A preferred stock (each such share of preferred
stock converts into 10 shares of common stock), and options to purchase 500,000
shares of our common stock. Total expenses under such agreements are $2,512,249,
$1,731,045 of which has been reflected as amortized expenses in 2003 and 2002,
and the remainder of which is to be amortized in subsequent periods over the
respective terms of such agreements. The difference between such total expenses
and the amount amortized is reflected as unamortized cost of stock issued for
services on the balance sheet. We also recorded $3,000 of cash and $27,000 of
notes receivable received from such consultants. The notes receivable were then
written off as bad debt expense in the quarter ended March 31, 2002, $18,000 of
which was collected in 2003 and recorded as other income.

         Compared to year-end 2002, we are currently experiencing a
significantly improved cash position, as we had $1,482,786 in cash on December
31, 2003. Nevertheless, in order to continue operations, we remain dependent on
raising additional funds and have embarked upon another private placement of a
new class of preferred stock in the beginning of 2004 to raise capital.

         In 2003 we privately sold preferred stock for a total of $3,670,750 in
a private placement that closed in July 2003. The private placement commenced in
2001 and raised a total of $4,713,250. We received funds from time to time upon
sale of the preferred stock and placed the proceeds into our working capital
upon receipt. Due to market conditions, sales of preferred stock in the private
placement were slower than expected throughout 2001, 2002 and early 2003. Then,
in July of 2003, we raised the final $3,299,150 from sales of preferred stock
and were able to close the offering.

         In addition, we have outstanding warrants, which, upon exercise,
provided additional funding of $1,032,800 in 2003. The shares of common stock
were issued pursuant to a registration statement declared effective by the U.S.
Securities and Exchange Commission in 2001, registration statement number
333-43770. However, since May 1, 2002, such registration statement may not have
been "current" because the registration statement had not been amended to
include our most recent audited financial statements. As a result, the former
warrant holders may be entitled to demand a rescission of their previous
exercises of common stock. We intend to make a rescission offer, in the second
quarter of 2004, to all warrant holders who exercised warrants during the period
from May 1, 2002 through the date of the rescission offer. Once made, the
rescission offer is expected to remain open for 30 days. The rescission offer
would require us to repurchase the shares of common stock issued upon exercise
of the warrants at their original exercise price, $.50 for the Class A warrants
and $3.00 for the Class B warrants, at each warrant holder's option. If all
warrant holders accepted the rescission offer, we would be required to pay
$1,246,800 plus interest, which amount would be reduced to the extent of the
proceeds from any sales of the underlying common stock by the former warrant
holders. Acceptance of the rescission offer by all former warrant holders could
have a material adverse effect. The current market price is over the $.50
exercise price of the Class A warrants, and if that remains true, we would


                                       19
<PAGE>

expect no former holders of Class A Warrants to accept the rescission offer. The
current market price is below the $3.00 exercise price of the Class B warrants.
Only 16,600 Class B warrants were exercised during the rescission offer period,
making our potential rescission liability to the former Class B warrant holders
equal to $49,800 plus interest, which amount would be reduced to the extent of
any sales of the underlying common stock by the former warrant holders.

         Accounts receivable increased to $277,665 on December 31, 2003,
compared to $165,024 on December 31, 2002, due to a decrease in the allowance
for doubtful accounts and increased sales.

         Net fixed assets increased to $320,193 on December 31, 2003, from
$26,224 a year earlier, due to leasehold improvements for an additional 7,500
square fee of space leased in July 2003; new equipment, including a phone system
and two servers, as well as upgrades of our computer network; and a new vehicle
for use by our CEO in the performance of his duties, including sales, marketing
and investor relations duties.

         Notes payable decreased to $28,946 on December 31, 2003, compared to
$414,720 on December 31, 2002, as we repaid most of the outstanding notes
payable with the proceeds from our private placement that closed in July 2003.

         There is intense competition in the speaker business with other
companies that are much larger and national in scope and have greater financial
resources than we have. We will require additional capital to continue our
growth in the wholesale speaker market. We are relying upon our ability to
obtain the necessary financing through the issuance of equity and upon our
relationships with our lenders to sustain our viability.

         In the past, we have been able to privately borrow money from
individuals by the issuance of notes and have sold our stock to raise capital.
We intend to continue to do so as needed. However, we cannot be certain that we
will continue to be able to successfully obtain such financing. If we fail to do
so, we may be unable to continue as a viable business.

         In March 2004, we commenced an offering of up to 1,000,000 shares of
Series B preferred stock at $20.00 per share. Each share is convertible into ten
shares of our common stock six months after purchase. Prior to conversion, the
shares have no voting rights. Attached to each preferred share are ten of our
class C warrants. Each class C warrant has a term of three years and provides
the right to purchase one share of our common stock at $7.00 per share. The
class C warrants are immediately exercisable and detachable from the preferred
share. If the average closing market price for our common stock is equal to or
greater than $10.50 per share for a period of 30 days, then we are entitled to
repurchase such warrants, with 30 days notice, at a price of $.001 per warrant.
Through March 16, 2004, 18,500 shares of the preferred stock, series B, have
been sold for $370,000.

FORWARD-LOOKING INFORMATION

         This report, as well as our other reports filed with the SEC and our
press releases and other communications, contain forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Forward-looking statements include all statements regarding our
expected financial position, results of operations, cash flows, dividends,


                                       20
<PAGE>

financing plans, strategy, budgets, capital and other expenditures, competitive
positions, growth opportunities, benefits from new technology, plans and
objectives of management, and markets for stock. These forward-looking
statements are based largely on our expectations and, like any other business,
are subject to a number of risks and uncertainties, many of which are beyond our
control. The risks include those stated in the "Risk Factors" section of this
report and economic, competitive and other factors affecting our operations,
markets, products and services, expansion strategies and other factors discussed
elsewhere in this report and the other documents we have filed with the
Securities and Exchange Commission. In light of these risks and uncertainties,
there can be no assurance that the forward-looking information contained in this
report will in fact prove accurate, and our actual results may differ materially
from the forward-looking statements.

ITEM 7.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
         --------------------------------------------------------

See the financial supplement, beginning on page F-1.

         SLS INTERNATIONAL, INC.
         December 31, 2003
         -----------------

         Independent Auditor's Report                         F-2
         Balance Sheet                                        F-3
         Statement of Operations                              F-4
         Statement of Shareholders' Deficit                   F-5
         Statement of Cash Flows                              F-6
         Notes to Financial Statements                        F-7

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

         This item is inapplicable, as no such changes or disagreements have
occurred.

ITEM 8A. CONTROLS AND PROCEDURES.
         -----------------------

         As of March 1, 2004, our Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of December 31, 2003 for purposes of
preparation of this Annual Report on Form 10-KSB. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to December 31, 2003. However,
as a result of the continuing expansion of our business, we are currently
considering enhancements to our controls and procedures, particularly with
respect to the preparation of our quarterly unaudited financial statements.

                                       21
<PAGE>

                                    PART III

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

         The following table sets forth the names, ages and offices of the
Company's executive officers and directors:

NAME                     AGE       OFFICE
---------------------    ---       --------------------------------

John M. Gott              53       President, CEO, CFO and Director
Robert H. Luke, Ph.D.     61       Director
Michael L. Maples         54       Director

         JOHN M. GOTT, our President, Chief Executive Officer, Chief Financial
Officer and Director, founded SLS in July 2000 in connection with the merger
between SLS and its predecessor. He was also founder and Chief Executive Officer
of Sound and Lighting Specialists, Inc., the predecessor of SLS International,
Inc., which was founded in October 1994. The predecessor engaged in the sale and
installation of sound and lighting systems. In that capacity he spearheaded our
growth with respect to the sale and installation of sound and lighting systems
across the world, including in Carnegie Hall and Disney World in Tokyo. He was
our primary salesman through August 2001, when we hired another salesman. Mr.
Gott has also been instrumental in the conceptual design and marketing of most
of our products. Mr. Gott has acted in his current capacities since our
inception.

         ROBERT H. (ROBIN) LUKE, PH.D., has served as a Director since 2001. He
is Professor of Marketing and the Department Head of the Marketing Department at
Southwest Missouri State University. He has served as the first Department Head
of two Marketing Departments and directed the development of the MBA/MPA
programs for the University of the Virgin Islands. Dr. Luke has owned and
developed several businesses and regularly consults with major U.S. corporations
and institutions on marketing issues as a Senior Consultant with R.H. Luke &
Associates. He served the Academy of Marketing Science as a member of its Board
of Governors from 1992 to 1996 and as Vice President of Development, Vice
President and Vice President for Academic Affairs. He presently serves as a
Board Member of the Marketing Management Association. He has given or continues
to give service commitments to the Boards of Directors or Boards of Advisors of
the following organizations: Missouri Partnership for Outstanding Schools, Ozark
Greenways, Community Investment Alliance, Sports Directories International, the
Community Foundation of the Ozarks, Vision 20/20, the Downtown Springfield
Association, Ozarks Chapter of the Boy Scouts of America, A+ Advisory Board of
Glendale High School, and Lake County Youth Soccer.

         Dr. Luke has presented numerous papers at international, national and
regional marketing conferences. He serves on the Editorial Review Board of the
Journal of the Academy of Marketing Science, Journal of Marketing Management.
His writings have appeared in over 14 publications. He is the author of Business
Careers, an informational source on career opportunities for students,
counselors and advisors wishing to know more about business professions. At the
age of sixteen, under the name Robin Luke, he wrote and performed "Susie
Darling," a song that sold over two million copies from l958 to 1960 and became
number one around the world. His career as a recording artist spanned five years
and 14 records. He has received numerous awards, including "Distinguished Fellow
of the Academy of Marketing Science," the Marketing Management Association's


                                       22
<PAGE>

Firooz Hekmat Award in Consumer Behavior and their prestigious Marketing
Excellence Award, "best paper awards" from national and international
organizations, and the Gift of Time Award from his home city of Springfield
Missouri.

         MICHAEL L. MAPLES has served as a Director since 2001. He is Chief
Financial Officer, Chief Administrative Officer, Vice President, Treasurer and
Corporate Secretary of TranSystems Corporation, an engineering, planning, and
consulting firm for the transportation industry. From 1994 to 1996, he was
Senior Financial Consultant for Glass & Associates, a consultant to businesses
in critical stages of development. From 1991 to 1994, Mr. Maples was Senior Vice
President and Controller for Franklin Savings Association, a publicly held group
of financial companies. From 1987 to 1991, he was Vice President of Finance &
Information Systems for McNally Wellman Company. From 1987 to 1989 he was
Treasurer and Corporate Secretary for McNally Pittsburgh, Inc., a group of
privately owned engineering and manufacturing companies supplying equipment,
systems, parts, and service to the international and domestic material handling
industry. From 1983 to 1987, he was Controller and Staff CPA for Gage & Tucker,
a multi-office law firm specializing in corporate representation. From 1976 to
1983, he was a Certified Public Accountant, first at Touche Ross & Co., then
with a regional firm, and finally as a sole practitioner.

         Each director is elected at the annual meeting of stockholders and each
director is elected to serve until his successor shall be elected and shall
qualify. Executive officers may be removed from office at any time by the Board
of Directors.

         We presently have no audit, compensation or nominating committee.
However, Mr. Maples qualifies as an audit committee financial expert and he is
"independent" as defined in Rule 4200(a)(15) of the NASD's listing standards.

         As disclosed above, we currently have only one executive officer, who
is also a director, and two other directors. Due to the number of other demands
on their limited time, we have not yet dedicated the time necessary to formulate
and adopt a code of ethics. However, we intend to adopt a code of ethics in
2004.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
-------------------------------------------------------

         No reports have been required under Section 16(a) of the Securities
Exchange Act of 1934, as amended, because our common stock is not registered
under Section 12 of such act.

ITEM 10. EXECUTIVE COMPENSATION.
         ----------------------

         The following summarizes the principal compensation received by our
executive officers for the fiscal years indicated:

                                       23
<PAGE>
<TABLE>
<CAPTION>
                                                                           LONG-TERM COMPENSATION
NAME &                                                  OTHER ANNUAL       COMMON STOCK UNDERLYING
PRINCIPAL POSITION   YEAR      SALARY     BONUS        COMPENSATION(a)        AWARDS OF OPTIONS
------------------   ----      ------     -----        ---------------        -----------------
<S>                  <C>      <C>        <C>          <C>                      <C>
John M. Gott         2003     $60,460    $  0         $ 7,305                  10,000
                     2002     $50,440       0         $ 3,898                       0
</TABLE>
----------
(a) Represents $3,768 in 2003 and $3,898 in 2002 for payments of medical
    insurance and $3,537 in 2003 for personal use of a company-owned automobile.

         Mr. Gott also serves as a director but receives no compensation for
acting as a director. We currently provide directors wwho are not officers with
an annual grant of options to purchase 10,000 shares of our common stock at fair
market value on the date of grant.

         Stock Options. The following table contains information concerning
stock options granted in 2003, including the potential realizable value of each
grant assuming that the market value of our common stock were to appreciate from
the date of grant to the expiration of the option at annualized rates of (a) 5%
and (b) 10%, in each case compounded annually over the term of the option. The
assumed rates of appreciation shown in the table have been specified by the U.S.
Securities and Exchange Commission for illustrative purposes only and are not
intended to predict future stock prices, which will depend upon various factors,
including market conditions and future performance and prospects. Options become
exercisable at the time or times determined by the Compensation Committee of the
Board of Directors; the options shown below were immediately exercisable. All of
the options shown below have purchase prices equal to the fair market value of
our common stock on the date of grant.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                   NUMBER OF SHARES OF      PERCENT OF TOTAL OPTIONS
                 COMMON STOCK UNDERLYING     GRANTED TO EMPLOYEES IN     EXERCISE PRICE
NAME                 OPTIONS GRANTED               FISCAL YEAR              PER SHARE      EXPIRATION DATE
----------------------------------------------------------------------------------------------------------
<S>                      <C>                          <C>                     <C>              <C>
John M. Gott             10,000                       6.9%                    $0.25            4/5/2013
----------------------------------------------------------------------------------------------------------
</TABLE>

         The following table sets forth the value of unexercised "in-the-money"
options held at December 31, 2003 (the difference between the aggregate purchase
price of all such options held and the market value of the shares covered by
such options at December 31, 2003).

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
                     NO. OF SHARES UNDERLYING             VALUE OF UNEXERCISED
                  UNEXERCISED OPTIONS AT 12/31/03   IN-THE-MONEY OPTIONS AT 12/31/03
                           (EXERCISABLE/                      (EXERCISABLE/
NAME                      UNEXERCISABLE)                     UNEXERCISABLE)
------------------------------------------------------------------------------------
<S>                         <C>                                <C>
John M. Gott                10,000 / 0                         $32,000 / 0
------------------------------------------------------------------------------------
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         ------------------------------------------------------------------
         RELATED STOCKHOLDER MATTERS.
         ---------------------------

         The following table sets forth certain information as of January 27,
2004 with respect to the beneficial ownership of our common stock by all persons


                                       24
<PAGE>

known by us to be beneficial owners of more than 5% of the outstanding shares of
our common stock, by directors who own common stock and all officers and
directors as a group:

                                          NUMBER OF           PERCENT OF
NAME & ADDRESS                              SHARES             CLASS(1)
-------------------------------------   -------------         ----------

John M. Gott                            10,061,699(2)            35.2%
1020 S. Pickwick
Springfield, MO  65804

Robert H. Luke                              16,500(3)                *
818 N. Forest
Springfield, MO  65802

Michael L. Maples                           10,000(3)                *
12608 Howe Drive
Leawood, KS  66209

Richard L. Norton                        3,244,198               11.3%
818 N. Forest
Springfield, MO  65802

Officers and Directors
as a Group (3 persons)                  10,088,199               35.3%

All such shares are owned
  directly by the named stockholders.
----------
 *  Less than one percent
(1) Based upon a total of 28,616,128 shares outstanding on January 27, 2004.
(2) Includes (a) an option to purchase 3,244,198 shares owned by Richard L.
    Norton for $.05 per share, or if lower, 50% of the 5-day average trading
    price and (b) an option to purchase 10,000 shares at $0.25 per share.
(3) Includes options to purchase 10,000 shares at $0.25 per share.

                                       25
<PAGE>

EQUITY COMPENSATION PLANS

         On December 31, 2003, we had the following securities issued and
available for future issuance under equity compensation plans:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                                                           (c)
                                                                                                   NUMBER OF SECURITIES
                                           (a)                                                    REMAINING AVAILABLE FOR
                                   NUMBER OF SECURITIES TO                (b)                   FUTURE ISSUANCE UNDER EQUITY
                                  BE ISSUED UPON EXERCISE OF     WEIGHTED-AVERAGE EXERCISE          COMPENSATION PLANS
                                    OUTSTANDING OPTIONS,       PRICE OF OUTSTANDING OPTIONS,   (EXCLUDING SECURITIES REFLECTED
                                     WARRANTS AND RIGHTS           WARRANTS AND RIGHTS                 IN COLUMN (A))
------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                          <C>                               <C>
EQUITY COMPENSATION                   645,000 shares of             $0.29 per share                 1,355,000 shares of
PLANS APPROVED BY                       common stock                                                 common stock
SECURITY HOLDERS
------------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION                   840,000 shares of             $0.25 per share                          0
PLANS NOT APPROVED                      common stock
BY SECURITY HOLDERS
------------------------------------------------------------------------------------------------------------------------------
TOTAL                                1,485,000 shares of          $0.27 per share of               1,355,000 shares of
                                        common stock                  common stock                      common stock
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

STOCK OPTION PLAN

         Our Board of Directors approved the SLS International, Inc. 2000 Stock
Purchase and Option Plan (the "Plan") and the plan was approved by existing
stockholders.

         Our Board of Directors administers the Plan. The Plan affords key
employees, officers, and consultants, who are responsible for our continued
growth, an opportunity to acquire an investment interest in SLS, and to create
in such individuals a greater incentive and concern for the welfare of SLS. By
means of this 2000 Stock Purchase and Option Plan, we seek to retain the
services of persons now holding key positions and to secure the services of
persons capable of filling such positions.

         We have reserved up to 2,000,000 shares of common stock for issuance
upon exercise of options that may be issued from time to time under the Plan.
The shares to be issued are subject to adjustment in the event of stock
dividends, splits and other events that affect the number of shares of common
stock outstanding.

         Maximum Purchase. The options offered in the plan are a matter of
separate inducement and are in addition to any salary or other compensation for
the services of any key employee or consultant. The options granted under the
plan are intended to be either incentive stock options or non-qualified or
non-statutory stock options.

         Option. Participants will receive such options as are granted from time
to time by the Board of Directors. The option will state the number of shares
and price of common stock to be purchased upon exercise of the options by the
option holder.

         Exercise Price. The purchase price per share purchasable under an
option will be determined by the Board of Directors. However, for statutory


                                       26
<PAGE>

options, the purchase price shall not be less than 90% of the fair market value
of a share on the date of grant of such option. Furthermore, any option granted
to a participant under the plan who, at the time the option is granted, is one
of our officers or directors, the purchase price shall not be less than 100% of
the fair market value of a share on the date of grant of such option. In the
case of an incentive stock option granted to a participant who, at the time the
option is granted, is a 10% stockholder, the purchase price for each share will
be an amount not less than 110% of the fair market value per share on the date
the incentive stock option is granted.

         Term of Option. The term of each option shall be fixed by the
Administrator which in any event will not exceed a term of 10 years from the
date of the grant.

         Termination of Employment. The Administrator will have the right to
specify the effect to a participant upon his or her retirement, death,
disability, leave of absence or any other termination of employment during the
term of any option.

         Amendments. The Board of Directors may amend, suspend, discontinue or
terminate the Plan; provided, however, that, without approval of our
stockholders, no such amendment, suspension, discontinuation or termination will
be made that would (1) cause Rule 16b-3 under the Securities Exchange Act of
1934 to become unavailable with respect to the Plan; (2) violate the rules or
regulations of any national securities exchange on which our shares are traded
or the rules or regulations of the NASD that are applicable to us; or (3) cause
us to be unable, under the Internal Revenue Code, to grant investment stock
options under the Plan.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
         ----------------------------------------------

         During 1999, certain receivables totaling $80,000 due to SLS from Mr.
Gott and Richard Norton were paid by them through an assignment of certain
equipment rental fees. The assigned fees had been due them individually for
equipment owned by them and leased to non-affiliated third parties. We also
received a commission from Messrs. Gott and Norton for handling the rentals and
income over a period of three years on their behalf. As of December 31, 2003,
Mr. Gott owed $511 to us.

                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
         --------------------------------

         Reports on Form 8-K. We filed the following Reports on Form 8-K during
the fourth quarter of our 2003 fiscal year and to date in the following quarter:

Date                                Subject Matter
----                                --------------

March 17, 2004             Announcement of the acquisition of Evenstar, Inc.

         Exhibits. The exhibits to this Report are listed below. Other than
exhibits that are filed herewith, all exhibits listed below are incorporated
herein by reference. Exhibits indicated by an asterisk (*) are the management
contracts and compensatory plans, contracts or arrangements required to be filed
as exhibits to this Report.

                                       27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT                                                           WHERE LOCATED
--------------------------------------------------------------    -----------------------------------------------
<S>                                                               <C>
Plan of Reorganization                                            Exhibit 2 to Registration Statement on Form
                                                                  SB-2 filed August 15, 2000

Articles of Incorporation                                         Exhibit 3(I) to Registration Statement on
                                                                  Form SB-2 filed August 15, 2000

Amendment and Restatement of Certificate of                       Exhibit 3(ii) to Registration Statement on
Incorporation                                                     Form SB-2 filed August 15, 2000

By-Laws                                                           Exhibit 3(iii) to Registration Statement on
                                                                  Form SB-2 filed August 15, 2000

Amendment to By-laws (Article VIII)                               Filed herewith

Specimen Certificate of Common Stock                              Exhibit 4(I) to Amendment No. 1 to Registration
                                                                  Statement on Form SB-2 filed December 1, 2000

Form of A Warrant                                                 Exhibit 4(ii) to Registration Statement on Form
                                                                  SB-2 filed August 15, 2000

Form of B Warrant                                                 Exhibit 4(iii) to Registration Statement on
                                                                  Form SB-2 filed August 15, 2000

Commercial Property Lease Agreement between Scenic Properties,    Exhibit 10.1 to Form 10-QSB for quarter ended
Inc., and SLS International, Inc., dated September 1, 2003        September 30, 2003, filed November 11, 2003

Agreement dated February 24, 2000 between Igor Levitsky and       Exhibit 10(i) to Amendment No. 1 to
Sound and Lighting Specialists, Inc.                              Registration Statement on Form SB-2 filed
                                                                  December 1, 2000

Assignment of Technology Rights by Igor Levitsky dated            Exhibit 10(iii) to Amendment No. 1 to
November 9, 2000                                                  Registration Statement on Form SB-2 filed
                                                                  December 1, 2000

Form of Distributor Agreement                                     Exhibit 10(iv) to Amendment No. 2 to
                                                                  Registration Statement on Form SB-2 filed
                                                                  January 16, 2001

2000 Stock Purchase and Option Plan*                              Exhibit 99(i) to Registration Statement on Form
                                                                  SB-2 filed August 15, 2000

Form of Option*                                                   Exhibit 99(ii) to Registration Statement on
                                                                  Form SB-2 filed August 15, 2000

</TABLE>
                                       28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT                                                           WHERE LOCATED
--------------------------------------------------------------    -----------------------------------------------
<S>                                                               <C>
Letter Agreement, dated January 5, 2002 between                   Exhibit 10.1 to Amendment No. 1 to
SLS International, Inc. and Internet PR Group Inc.                Form 10-QSB for quarter ended March 31, 2002,
                                                                  filed May 21, 2003

Share Purchase Agreement, dated January 22, 2002                  Exhibit 10.2 to Amendment No. 1 to
between SLS International, Inc. and Herbie Herbert                Form 10-QSB for quarter ended March 31, 2002,
                                                                  filed May 21, 2003

Share Purchase Agreement, dated January 22, 2002                  Exhibit 10.3 to Amendment No. 1 to
between SLS International, Inc. and Thomas Panos                  Form 10-QSB for quarter ended March 31, 2002,
                                                                  filed May 21, 2003

Consulting Agreement, dated April 9, 2002, between SLS            Exhibit 10.1 to Amendment No. 1 to
International, Inc. and The Equitable Group, LLC                  Form 10-QSB for quarter ended June 30, 2002,
                                                                  filed May 21, 2003

Letter Agreement, dated April 2, 2002, between SLS                Exhibit 10.2 to Amendment No. 1 to
International, Inc. and Muir Crane & Co.                          Form 10-QSB for quarter ended June 30, 2002,
                                                                  filed May 21, 2003

Letter Agreement, dated April 18, 2002, between SLS               Exhibit 10.3 to Amendment No. 1 to
International, Inc. and Sam F. Hamra                              Form 10-QSB for quarter ended June 30, 2002,
                                                                  filed May 21, 2003

Consulting Services Agreement, dated June 19, 2002, between       Exhibit 10.4 to Amendment No. 1 to
SLS International, Inc. and Liquid Solutions Corp.                Form 10-QSB for quarter ended June 30, 2002,
                                                                  filed May 21, 2003

Letter Agreement, dated July 17, 2002, between SLS                Exhibit 10.1 to Amendment No. 1 to
International, Inc. and Alfred V. Greco PLLC regarding            Form 10-QSB for quarter ended September 30,
settlement  of Alfred V. Greco v. SLS International, Inc.         2002, filed May 21, 2003

Letter Agreement, dated July 17, 2002, between SLS                Exhibit 10.2 to Amendment No. 1 to
International, Inc. and Alfred V. Greco PLLC                      Form 10-QSB for quarter ended September 30,
regarding services to be provided by Alfred V. Greco PLLC         2002, filed May 21, 2003

Consulting Agreement, dated August 15, 2002,                      Exhibit 10.3 to Amendment No. 1 to
between SLS International, Inc. and Atlantic Services Ltd.        Form 10-QSB for quarter ended September 30,
                                                                  2002, filed May 21, 2003

Consulting Agreement, dated September 10, 2002,                   Exhibit 10.4 to Amendment No. 1 to Form 10-QSB
between SLS International, Inc. and Art Malone Jr.                for quarter ended September 30, 2002, filed May
                                                                  21, 2003
</TABLE>

                                       29
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT                                                           WHERE LOCATED
--------------------------------------------------------------    -----------------------------------------------
<S>                                                               <C>
Settlement Agreement and General Release dated                    Exhibit 10.20 to Form 10-KSB for year ended
April 1, 2003 between McQuerterGroup and SLS                      December 31, 2002, filed May 21, 2003
International, Inc.

Letter Agreement dated October 25, 2002 between                   Exhibit 10.21 to Form 10-KSB for year ended
SLS International, Inc. and Patrick J. Armstrong                  December 31, 2002, filed May 21, 2003

Letter Agreement dated October 25, 2002 between                   Exhibit 10.22 to Form 10-KSB for year ended
SLS International, Inc. and Larry R. Stessel                      December 31, 2002, filed May 21, 2003

Consulting Agreement, dated November 18, 2002                     Exhibit 10.23 to Form 10-KSB for year ended
between SLS International, Inc. and Atlantic Services Ltd.        December 31, 2002, filed May 21, 2003

Investor Relations and Financial Public Relations                 Exhibit 10.24 to Form 10-KSB for year ended
Consulting Agreement, dated December 15, 2002                     December 31, 2002, filed May 21, 2003
between SLS International, Inc. and Worldwide Financial
Marketing, Inc.

Consulting Agreement dated February 20, 2003,                     Exhibit 10.1 to Form 10-QSB for quarter ended
between SLS International, Inc. and Tom Puccio                    March 31, 2003, filed June 16, 2003

Option Agreement, dated as of May 19, 2003,                       Exhibit 10.1 to Form 10-QSB for quarter ended
between the Company and Steerpike (Overseas) Ltd.                 June 30, 2003, filed August 14, 2003

Letter Agreement, dated as of May 19, 2003,                       Exhibit 10.2 to Form 10-QSB for quarter ended
between the Company and Steerpike (Overseas) Ltd.                 June 30, 2003, filed August 14, 2003

Letter Agreement, dated as of May 19, 2003,                       Exhibit 10.3 to Form 10-QSB for quarter ended
between the Company and Steerpike Inc.                            June 30, 2003, filed August 14, 2003

Letter Agreement, dated as of July 10, 2003,                      Exhibit 10.4 to Form 10-QSB for quarter ended
between the Company and Alfred V. Greco PLLC,
amending prior letter agreement, dated July 17,                   June 30, 2003, filed August 14, 2003
2002, concerning the settlement of certain litigation
between such parties

Consulting Agreement, dated as of July 14, 2003, between SLS      Exhibit 10.2 to Form 10-QSB for quarter ended
International, Inc. and Atlantic Services Ltda.                   September 30, 2003, filed November 11, 2003
</TABLE>

                                       30
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT                                                           WHERE LOCATED
--------------------------------------------------------------    -----------------------------------------------
<S>                                                               <C>
Consulting Agreement, dated as of July 22, 2003,                  Exhibit 10.3 to Form 10-QSB for quarter ended
between SLS Loudspeakers and Atlantic Services Ltda.              September 30, 2003, filed November 11, 2003

Consulting Agreement, dated as of August 11, 2003,                Exhibit 10.4 to Form 10-QSB for quarter ended
between SLS International, Inc. and G. Ghecko Enterprises         September 30, 2003, filed November 11, 2003

Contract for Promotional Services, dated July 14, 2003,           Exhibit 10.5 to Form 10-QSB for quarter ended
between Ronald E. Gee and SLS International, Inc.                 September 30, 2003, filed November 11, 2003

Contract for Promotional Services, dated August 5, 2003,          Exhibit 10.6 to Form 10-QSB for quarter ended
between Ronald E. Gee and SLS International, Inc.                 September 30, 2003, filed November 11, 2003

Contract for Promotional Services, dated September 5, 2003,       Exhibit 10.7 to Form 10-QSB for quarter ended
between Ronald E. Gee and SLS International, Inc.                 September 30, 2003, filed November 11, 2003

Consulting Agreement, dated as of August 11, 2003, between SLS    Exhibit 10.8 to Form 10-QSB for quarter ended
Loudspeakers and Berkshire International, LLC                     September 30, 2003, filed November 11, 2003

Letter Agreement, dated August 29, 2003, between SLS              Exhibit 10.9 to Form 10-QSB for quarter ended
International and Art Malone, Jr.                                 September 30, 2003, filed November 11, 2003

Consulting Agreement, dated August 21, 2003, between SLS          Exhibit 10.10 to Form 10-QSB for quarter ended
International, Inc. and Grant Galloway                            September 30, 2003, filed November 11, 2003

Agreement, dated July 31, 2003 between SLS International, Inc.    Exhibit 10.11 to Form 10-QSB for quarter ended
and Wall Street Investor Relations Corp.                          September 30, 2003, filed November 11, 2003

30 Days Public Relations Services Contracts, dated July 23,       Exhibit 10.12 to Form 10-QSB for quarter ended
2003, between Fitzgerald Galloway Consulting and SLS              September 30, 2003, filed November 11, 2003
International, Inc.

Merger Agreement, dated March 12, 2004, among SLS                 Exhibit 10.1 to Form 8-K filed March 17, 2004
International, Inc., Evenstar, Inc., Joel A. Butler, David L.
Butler, Patrick D. Butler, and Evenstar Mergersub, Inc.

Employment Agreement, dated March 12, 2004, between SLS           Exhibit 10.2 to Form 8-K filed March 17, 2004
International, Inc. and Joel A. Butler
</TABLE>

                                       31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT                                                           WHERE LOCATED
--------------------------------------------------------------    -----------------------------------------------
<S>                                                               <C>
Consulting Services Agreement, dated October 28, 2003, between    Filed herewith
SLS International, Inc. and Zane Sellis

Consulting Services Agreement, dated November 6, 2003, between    Filed herewith
SLS International, Inc. and George Iordanou

Consulting Services Agreement, dated November 10, 2003,           Filed herewith
between SLS International, Inc. and William F. Fischbach

Consulting Services Agreement, dated November 20, 2003,           Filed herewith
between SLS International, Inc. and Edward Decker

Consulting Services Agreement, dated November 20, 2003,           Filed herewith
between SLS International, Inc. and Christopher Obssuth

Stipulation for Entry of Judgment and Mutual General Release      Filed herewith

List of Subsidiaries of SLS International, Inc.                   Filed herewith

Consent of Weaver & Martin LLC Independent                        Filed herewith.
Certified Public Accountants

Certification of Periodic Report by Chief Executive Officer       Filed herewith
and Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002

Certification of Periodic Report by Chief Executive Officer       Filed herewith
and Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002

Consent Order of Missouri Securities Division and                 Exhibit 99(iv) to Post-Effective
SLS International, Inc.                                           Amendment No. 1 filed May 30, 2001

Promotional Shares Lock-In Agreement                              Exhibit 99(v) to Post-Effective Amendment No. 1
                                                                  filed May 30, 2001

Modification to Consent Order of Missouri Securities Division     Exhibit 99.1 to Post-Effective Amendment No. 2
and SLS International, Inc.                                       filed February 9, 2004
</TABLE>

                                       32
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         (1)      Audit Fees - The aggregate fees billed for professional
                  services rendered by Weaver & Martin, LLC, for the audit of
                  our financial statements and review of the financial
                  statements included in our quarterly reports on Form 10-QSB or
                  services that are normally provided by the accountant in
                  connection with statutory and regulatory filings or
                  engagements for the years ended December 31, 2003 and 2002
                  were $49,820 and $32,450, respectively.

         (2)      Audit-Related Fees - There were no other audit-related fees
                  billed by Weaver & Martin, LLC for the years ended December
                  31, 2003 and 2002.

         (3)      Tax Fees - There were no tax fees billed by Weaver and Martin,
                  LLC for the years ended December 31, 2003 and 2002.

         (4)      All Other Fees - There were no other fees billed by Weaver &
                  Martin, LLC for the years ended December 31, 2003 and 2002.

                                       33
<PAGE>


                                   SIGNATURES

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

                                            SLS INTERNATIONAL, INC.

                                            By /s/ J. Gott
                                               ---------------------------------
                                               J. Gott
                                               (President)
Date: March 30, 2004

         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 March 30, 2004.

    Signature                          Title
    ---------                          -----
/s/ J. Gott                  President, Chief Executive Officer, Chief
                             Financial Officer and Director
                             (Principal Executive Officer)

/s/ R. Luke, Ph.D.           Director
/s/ M. Maples                Director


/s/ J. Gott                  Chief Financial Officer
------------------           (Principal Financial Officer)
   (J. Gott)

                                       34
<PAGE>

                             SLS INTERNATIONAL, INC.

                              FINANCIAL STATEMENTS

                                DECEMBER 31, 2003


SLS INTERNATIONAL, INC. DECEMBER 31, 2003


Report of Independent Registered Public Accounting Firm        F-2

Balance sheet                                                  F-3

Statement of Operations                                        F-4

Statement of Shareholders' Deficit                             F-5

Statement of Cash Flows                                        F-6

Notes to Financial Statements                                  F-7



                                      F-1
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

STOCKHOLDERS AND DIRECTORS
SLS INTERNATIONAL, INC.

We have audited the accompanying balance sheet of SLS International, Inc. as of
December 31, 2003 and 2002 and the related statements of operations,
shareholders' deficit, and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatements. 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 financial statements referred to above present fairly, in
all material respects, the financial position of SLS International, Inc. as of
December 31, 2003 and 2002 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003 in conformity
with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and is dependent upon the continued sale of its securities or obtaining debt
financing for funds to meet its cash requirements. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.




WEAVER & MARTIN, LLC
Kansas City, Missouri
March 12, 2004

                                      F-2
<PAGE>


SLS INTERNATIONAL, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
                                                                         December 31,      December 31,
                                                                             2003             2002
                                                                         ------------      -----------
<S>                                                                      <C>               <C>
Assets
Current assets:
     Cash                                                                $  1,482,786      $     4,240
     Accounts receivable, less allowance for doubtful accounts of
       $45,000 and $132,396 for December 31, 2003 and 2002                    277,665          165,024
     Inventory                                                                590,297          261,573
     Prepaid expenses and other current assets                                  6,850            6,936
                                                                         ------------      -----------
                Total current assets                                        2,357,598          437,773
                                                                         ------------      -----------
Fixed assets:
     Vehicles                                                                  73,376           31,026
     Equipment                                                                159,212           55,083
     Leasehold improvements                                                   175,621            3,376
                                                                         ------------      -----------
                                                                              408,209           89,485
Less accumulated depreciation                                                  88,016           63,261
                                                                         ------------      -----------
                Net fixed assets                                              320,193           26,224
                                                                         ------------      -----------
                                                                         $  2,677,791      $   463,997
                                                                         ============      ===========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
     Current maturities of long-term debt and notes payable              $     28,946      $   414,720
     Accounts payable                                                         357,287          417,449
     Due to shareholders                                                           --           23,193
     Accrued liabilities                                                       26,138          170,897
                                                                         ------------      -----------
                Total current liabilities                                     412,371        1,026,259
                                                                         ------------      -----------
Notes payable, less current maturities                                         15,931               --
                                                                         ------------      -----------
Commitments and contingencies:
Shareholders' equity (deficit):
     Preferred stock, Series A, $.001 par, 2,000,000 shares
       authorized; 1,545,300 issued at December 31, 2003                        1,545               --
     Preferred stock, Series A, not issued but owed to buyers;
         315,000 shares at December 31, 2002                                       --              315
     Preferred stock, Series B, $.001 par, 1,000,000 shares
       authorized; no shares issued as of December 31, 2003 and 2002               --               --
     Discount on preferred stock                                           (1,886,576)        (233,294)
     Contributed capital - preferred                                        7,411,585        1,852,183
     Common stock, $.001 par; 75,000,000 shares authorized;
       28,230,180 shares and 21,453,528 shares issued at
       December 31, 2003 and 2002                                              28,231           21,454
     Common stock not issued but owed to buyers; 183,000 shares and
        '1,222,000 shares at December 31, 2003 and 2002                           183            1,222
     Contributed capital - common                                           8,319,286        3,386,624
     Unamortized cost of stock issued for services                           (781,204)        (524,984)
     Retained deficit                                                     (10,843,561)      (5,065,782)
                                                                         ------------      -----------
                Total shareholders' equity (deficit)                        2,249,489         (562,262)
                                                                         ------------      -----------
                                                                         $  2,677,791      $   463,997
                                                                         ============      ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>

SLS INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                              --------------------------------------------
                                                  2003            2002            2001
                                              ------------    ------------    ------------
<S>                                           <C>             <C>             <C>
Revenue                                       $    968,245    $    790,582    $    353,797

Cost of sales                                      601,213         537,243         286,924
                                              ------------    ------------    ------------

Gross profit                                       367,032         253,339          66,873

General and administrative expenses              4,492,238       2,468,565       1,068,335
                                              ------------    ------------    ------------

Loss  from  operations                          (4,125,205)     (2,215,226)     (1,001,462)

Other income (expense):
      Interest expense                             (39,170)        (33,306)        (46,011)
      Interest and miscellaneous, net              185,034           6,207           7,299
                                              ------------    ------------    ------------

                                                   145,864         (27,099)        (38,712)
                                              ------------    ------------    ------------

Loss before income tax                          (3,979,341)     (2,242,325)     (1,040,174)

Income tax provision                                    --              --              --
                                              ------------    ------------    ------------

Net loss                                        (3,979,341)     (2,242,325)     (1,040,174)
                                              ------------    ------------    ------------

Deemed dividend associated with
   beneficial conversion of preferred stock     (1,798,438)       (552,100)        (24,706)
                                              ------------    ------------    ------------

Net loss availiable to common shareholders    $ (5,777,779)   $ (2,794,425)   $ (1,064,880)
                                              ============    ============    ============


Basic and diluted earnings per share          $      (0.23)   $      (0.14)   $      (0.06)
                                              ============    ============    ============

Weighted average shares outstanding             25,496,816      20,446,711      17,406,111
                                              ============    ============    ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>
SLS INTERNATIONAL, INC.
STATEMENT OF SHAREHOLDERS' EQUITY ( DEFICIT)
<TABLE>
<CAPTION>

                       Preferred Stock,
                           Series A                                    Common Stock
                      -----------------  Discount on  Contributed  -------------------
                        Shares   Amount   Preferred     Capital       Shares    Amount
                      ---------  ------  -----------  -----------  ----------  -------
<S>                   <C>        <C>     <C>          <C>          <C>         <C>
Balance,
 January 1, 2001             --  $   --  $        --  $        --  14,271,528  $14,272
Net loss for the year        --      --                                    --       --
Sales of
 preferred stock        102,000     102           --      254,898          --       --
Beneficial conversion
 of preferred                --      --     (191,400)     191,400          --       --
Preferred discount
 amortization                --      --       24,706           --          --       --
Sales of common stock,
 net of expense              --      --           --           --   4,000,000    4,000
Warrants exercised           --      --           --           --     788,000      748
                      ---------  ------  -----------  -----------  ----------  -------
Balance,
 December 31, 2001      102,000     102     (166,694)     446,298  19,059,528   19,020
                      ---------  ------  -----------  -----------  ----------  -------
Net loss for the year        --      --           --           --          --       --
Sales of
 preferred stock        315,000     315           --      787,185          --       --
Beneficial conversion
 of preferred                --      --     (618,700)     618,700          --       --
Preferred discount
 amortization                --      --      552,100           --          --       --
Stock issued from
 prior period sales          --      --           --           --          --       40
Conversion of
 preferred to common   (102,000)   (102)          --           --          --       --
Sales of common stock        --      --           --           --     100,000      100
Common stock issued
 for services                --      --           --           --   2,195,000    2,195
Options issued
 for services                --      --           --           --          --       --
Services paid for on
 behalf of company           --      --           --           --          --       --
Amortization of stock
 issued for services         --      --           --           --          --       --
Common stock
 warrants exercised          --      --           --           --      99,000       99
                      ---------  ------  -----------  -----------  ----------  -------
Balance,
 December 31, 2002      315,000     315     (233,294)   1,852,183  21,453,528   21,454
                      ---------  ------  -----------  -----------  ----------  -------
Net loss for the year        --      --           --           --          --       --
Sales of
 preferred stock      1,468,300   1,468           --    3,669,282          --       --
Beneficial conversion
 of preferred                --      --   (3,451,720)   3,451,720          --       --
Preferred discount
 amortization                --      --    1,798,438           --          --       --
Stock issued from
 prior period sales          --      --           --           --   1,220,000    1,220
Conversion of
 preferred to common   (238,000)   (238)          --   (1,561,760)  2,380,000    2,380
Common stock issued
 for services                --      --           --           --     720,452      720
Options issued to
 employees & directors       --      --           --           --          --       --
Options issued
 for services                --      --           --           --          --       --
Options exercised for
 common stock                --      --           --           --      79,000       79
Amortization of stock
 issued for services         --      --           --           --          --       --
Conversion of "A"
 warrants for services       --      --           --           --     394,600      395
Common stock
 warrants exercised          --      --           --           --   1,982,600    1,983
Other                        --      --           --          160          --       --
                      ---------  ------  -----------  -----------  ----------  -------
Balance,
 December 31, 2003    1,545,300  $1,545  $(1,886,576) $ 7,411,585  28,230,180  $28,231
                      =========  ======  ===========  ===========  ==========  =======

[RESTUBBED]

<CAPTION>
                                           Unamortized
                                          cost of stock
                       Amount  Contributed    issued      Retained
                      Unissued  Capital    for services    Deficit       Total
                      -------- ----------  -----------  ------------  -----------
<S>                   <C>      <C>         <C>          <C>           <C>
Balance,
 January 1, 2001      $    --  $  401,528  $        --  $ (1,206,477) $  (790,677)
Net loss for the year      --          --           --    (1,040,174)  (1,040,174)
Sales of
 preferred stock           --          --           --            --      255,000
Beneficial conversion
 of preferred              --          --           --            --           --           -
Preferred discount
 amortization              --          --           --       (24,706)          --
Sales of common stock,
 net of expense            --     915,685           --            --      919,685
Warrants exercised         40     393,212           --            --      394,000
                      -------  ----------  -----------  ------------  -----------
Balance,
 December 31, 2001         40   1,710,425           --    (2,271,357)   (262,166)
                      -------  ----------  -----------  ------------  -----------
Net loss for the year      --          --           --    (2,242,325)  (2,242,325)
Sales of
 preferred stock           --          --           --            --      787,500
Beneficial conversion
 of preferred              --          --           --            --           --           -
Preferred discount
 amortization              --          --           --      (552,100)          --
Stock issued from
 prior period sales       (40)         --           --            --           --
Conversion of
 preferred to common    1,020        (918)          --            --           --
Sales of common stock     200      29,700           --            --       30,000
Common stock issued
 for services              --   1,071,755   (1,073,950)           --           --
Options issued
 for services              --     426,164     (426,164)           --           --
Services paid for on
 behalf of company         --      99,099      (99,099)           --           --
Amortization of stock
 issued for services       --          --    1,074,229            --    1,074,229
Common stock
 warrants exercised         2      50,399           --            --       50,500
                      -------  ----------  -----------  ------------  -----------
Balance,
 December 31, 2002      1,222   3,386,624     (524,984)   (5,065,782)    (562,262)
                      -------  ----------  -----------  ------------  -----------
Net loss for the year      --          --           --    (3,979,341)  (3,979,341)
Sales of
 preferred stock           --          --           --            --    3,670,750
Beneficial conversion
 of preferred              --          --           --            --           --      -
Preferred discount
 amortization              --          --           --    (1,798,438)          --
Stock issued from
 prior period sales    (1,220)         --           --            --           --
Conversion of
 preferred to common       --   1,559,618           --            --           --
Common stock issued
 for services              --     912,316     (913,036)           --           --
Options issued to
 employees & directors     --      23,134           --            --       23,134
Options issued
 for services              --   1,142,432           --            --    1,142,432
Options exercised for
 common stock             181      64,740           --            --       65,000
Amortization of stock
 issued for services       --          --      656,816            --      656,816
Conversion of "A"
 warrants for services     --     199,605           --            --      200,000
Common stock
 warrants exercised        --   1,030,817           --            --    1,032,800
Other                      --          --           --            --          160
                      -------  ----------  -----------  ------------  -----------
Balance,
 December 31, 2003    $   183  $8,319,286  $  (781,204) $(10,843,561) $ 2,249,489
                      =======  ==========  ===========  ============  ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                      F-5
<PAGE>

SLS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                     -----------------------------------------
                                                                        2003           2002           2001
                                                                     -----------    -----------    -----------
<S>                                                                  <C>            <C>            <C>
Operating activities:
     Net loss                                                        $(3,979,341)   $(2,242,325)   $(1,040,174)
     Adjustments to reconcile net income to cash flows
       from operating activities:
         Depreciation and amortization                                    24,755         15,018         15,838
         Amortization of cost of stock issued for services               856,816      1,074,229             --
         Expense of stock options granted for services                 1,165,566             --             --
         Gain on sale of fixed assets                                         --         (5,900)            --
     Change in assets and liabilities-
         Accounts receivable, less allowance for doubtful accounts      (112,641)       (95,839)       (53,237)
         Inventory                                                      (328,724)       (10,575)        17,564
         Prepaid expenses and other current assets                            86         (4,855)        80,329
         Accounts payable                                                (60,162)       220,616       (111,279)
         Due to shareholders                                             (23,193)        (8,693)         4,639
         Deferred revenue                                                     --             --        (70,270)
         Accrued liabilities                                            (144,759)       103,868         33,981
                                                                     -----------    -----------    -----------

         Cash used in operating activities                            (2,601,597)      (954,456)    (1,122,609)
                                                                     -----------    -----------    -----------

Investing activities:
     Proceeds from sale of fixed assets                                       --          5,900             --
     Additions of fixed assets                                          (318,724)        (4,353)       (14,324)
                                                                     -----------    -----------    -----------

         Cash provided by (used in) investing activities                (318,724)         1,547        (14,324)
                                                                     -----------    -----------    -----------

Financing activities:
     Sale of stock, net of expenses                                    4,768,550        868,000      1,568,685
     Borrowing of notes payable                                           21,461         55,000        135,000
     Repayments of notes payable                                        (391,144)       (14,241)      (536,020)
                                                                     -----------    -----------    -----------

         Cash provided by financing activities                         4,398,867        908,759      1,167,665
                                                                     -----------    -----------    -----------

Increase (decrease) in cash                                            1,478,546        (44,150)        30,732
Cash, beginning of period                                                  4,240         48,390         17,658
                                                                     -----------    -----------    -----------

Cash, end of period                                                  $ 1,482,786    $     4,240    $    48,390
                                                                     ===========    ===========    ===========


Supplemental cash flow information:
     Interest paid                                                   $    43,345    $     6,766    $    14,574
     Income taxes paid (refunded)                                             --             --             --

Noncash investing activities:
     Stock issued and options granted for services                   $ 2,278,602    $ 1,599,213    $        --
     Conversion of notes payable                                              --         50,000             --
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-6
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

1.  SIGNIFICANT ACCOUNTING POLICIES

         NATURE OF OPERATIONS:
             Prior to June 1999, the Company's one business segment was
             designing, selling and installing sound and lighting systems in
             churches, schools, theatres, and clubs and developing a proprietary
             loudspeaker line called SLS Loudspeakers.

             In June 1999, the Company ceased marketing, selling, and installing
             sound and lighting systems directly and began focusing all efforts
             towards being a loudspeaker manufacturer only and selling to
             dealers and contractors.

         INVENTORIES:
             Inventories are stated at the lower of cost (first-in, first-out
             method) or market. Inventory consists of finished goods, raw
             materials and parts. Included in inventory is $39,543 of finished
             goods consigned to sales representatives and dealers.

         FIXED ASSETS:
             Fixed assets are recorded at cost and depreciated over their
             estimated useful lives. Depreciation is provided on a straight-line
             basis. The lives used for items within each property classification
             range from 5 to 10 years.

             Maintenance and repairs are charged to expense as incurred.

             Depreciation expense was $24,755, $15,018, and $15,838 in the years
             ended December 31, 2003, 2002, and 2001.

         CONCENTRATION OF CREDIT RISK:
             The Company's financial instruments that are exposed to
             concentrations of credit risk consist primarily of cash equivalents
             and trade receivables. The Company's cash equivalents are in major
             banks and financial institutions. Concentrations of credit risk
             with respect to receivables are limited due to the large number of
             customers and their dispersion across geographic areas, however
             most are in the same industry; therefore, customers may be
             similarly affected by changes in economic and other conditions
             within the industry. The Company performs periodic credit
             evaluations of its customers' financial condition and generally
             does not require collateral. As of December 31, 2003, approximately
             26% of the Company's net accounts receivable balance was due from
             three customers.

         RESEARCH AND DEVELOPMENT:
              Research and development costs relating to both present and future
              products are expensed when incurred and included in operating
              expenses. Research and development costs were $31,435, $22,095 and
              $17,569 for the years ended December 31, 2003, 2002 and 2001.

                                      F-7
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         ADVERTISING AND PROMOTIONAL EXPENSES:
              Advertising and promotional expenses are charged to operations in
              the period incurred. Advertising and promotion expenses were
              $150,713, $42,209, and $88,804 for the years ended December 31,
              2003, 2002, and 2001.

         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 amounts reported in
             the financial statements and notes. Actual results could differ
             from those estimates, but management does not believe such
             differences will materially affect the Company's financial
             position, results of operations, or cash flows.

         REVENUE RECOGNITION:
             Revenue is recognized when the products are shipped to customers.
             Installation revenues are recognized when the projects (all less
             than one month) are completed.

             Deferred revenues represent deposits made to the Company by its
             customers according to designated credit terms. The revenues
             associated with these deposits will be recognized when shipments
             are made.

         ACCOUNTS RECEIVABLE:
             Accounts receivable are carried on a gross basis, with no
             discounting, less the allowance for doubtful accounts. No allowance
             for doubtful accounts is recognized at the time the revenue, which
             generates the accounts receivable, is recognized. Management
             estimates the allowance for doubtful accounts based on existing
             economic conditions, the financial conditions of the customers, and
             the amount and the age of past due accounts. Receivables are
             considered past due if full payment is not received by the
             contractual due date. Past due accounts are generally written off
             against the allowance for doubtful accounts only after all
             collection attempts have been exhausted.

         CASH EQUIVALENTS:
             The Company's cash equivalents consist principally of any financial
             instruments with maturities of generally three months or less and
             cash investments. The investment policy limits the amount of credit
             exposure to any one financial institution. The carrying values of
             these assets approximate their fair market values.

         LONG-LIVED ASSETS:
             Long-lived assets are reviewed for impairment whenever events or
             changes in circumstances indicate that the carrying amount may not
             be recoverable. Impairment is measured by comparing the carrying
             value of the long-lived asset to the estimated undiscounted future
             cash flows expected to result from the use of the assets and their
             eventual disposition. The Company determined that as of December


                                      F-8
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

             31, 2003, there had been no impairment in the carrying value of
             long-lived assets.

         GOODWILL AND OTHER INTANGIBLE ASSETS:
             Goodwill and indefinite life intangible assets are recorded at fair
             value and not amortized, but are reviewed for impairment at least
             annually or more frequently if impairment indicators arise, as
             required by SFAS No. 142. As of December 31, 2003 the Company had
             no goodwill or other intangible assets.

         FINANCIAL INSTRUMENTS:
             The carrying value of the Company's cash and cash equivalents,
             accounts receivable, accounts payable and accrued expenses
             approximate fair value because of the short-term maturity of these
             instruments. Fair values are based on quoted market prices and
             assumptions concerning the amount and timing of estimated future
             cash flows and assumed discount rates reflecting varying degrees of
             perceived risk. Based upon borrowing rates currently available to
             the Company with similar terms, the carrying value of notes payable
             and long-term debt approximates fair value.

         NET LOSS PER SHARE:
             The Company computes loss per share in accordance with SFAS No.
             128, Earnings Per Share. This standard requires dual presentation
             of basic and diluted earnings per share on the face of the income
             statement for all entities with complex capital structures and
             requires a reconciliation of the numerator and denominator of the
             diluted loss per share computation.

             The Company's potentially issuable shares of common stock pursuant
             to outstanding stock options and convertible preferred stock are
             excluded from the Company's diluted computation, as their effect
             would be anti-dilutive.

         RECENTLY ISSUED ACCOUNTING STANDARDS:
             In January 2003, the Financial Accounting Standards Board (FASB)
             issued Interpretation No. 46, "Consolidation of Variable Interest
             Entities, an Interpretation of Accounting Research Bulletin No. 51"
             (the Interpretation). The Interpretation requires the consolidation
             of variable interest entities in which an enterprise absorbs a
             majority of the entity's expected losses, receives a majority of
             the entity's expected residual returns, or both, as a result of
             ownership, contractual or other financial interests in the entity.
             Currently, entities are generally consolidated by an enterprise
             that has a controlling financial interest through ownership of a
             majority voting interest in the entity. The Interpretation was
             originally immediately effective for variable interest entities
             created after January 31, 2003, and effective in the fourth quarter
             of the Company's fiscal 2003 for those created prior to February 1,
             2003. However, in October 2003, the FASB deferred the effective
             date for those variable interest entities created prior to February
             1, 2003, until the Company's first quarter of fiscal 2004. The
             Company has substantially completed the process of evaluating the


                                      F-9
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

             Interpretation and believes its adoption will not have a material
             impact on its financial position or results of operations.

             In April 2003, the FASB issued Statement of Financial Accounting
             Standards No. 149, "Amendment of Statement 133 on Derivative
             Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149
             amends SFAS No. 133 to provide clarification on the financial
             accounting and reporting of derivative instruments and hedging
             activities and requires that contracts with similar characteristics
             be accounted for on a comparable basis. The standard is effective
             for contracts entered onto or modified after June 30, 2003, and for
             hedging relationships designed after June 30, 2003. The Company's
             adoption of SFAS No. 149 did not have a material impact on its
             financial position or results of operations.

             In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
             Instruments with Characteristics of Both Liabilities and Equity"
             (SFAS No. 150). SFAS No. 150 establishes how an issuer classifies
             and measures certain freestanding financial instruments with
             characteristics of liabilities and equity and requires that such
             instruments be classified as liabilities. The standard is effective
             for financial instruments entered into or modified after May 31,
             2003, and is otherwise effective in the fourth quarter of the
             Company's fiscal 2003. The Company's adoption of SFAS No. 150 did
             not have material impact on its financial position or results of
             operation.

         STOCK-BASED COMPENSATION:
             The Company accounts for its stock and options issued for services
             by non-employees based on the market value of the stock at the date
             of the agreement and the market value of the options as determined
             by the Black-Scholes pricing model. The cost is amortized to
             expense over the life of the agreement to provide services. The
             Company accounts for its stock option plan in accordance with the
             provisions of SFAS No. 123, "Accounting for Stock Based
             Compensation'. SFAS No. 123 permits entities to recognize as
             expense over the vesting period the fair value of all stock-based
             awards on the date of the grant. Alternatively, SFAS No. 123 also
             allows entities to apply the provisions of Accounting Principles
             Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
             Employees", and related interpretations and provides pro forma net
             income and pro forma earnings per share disclosures for employee
             stock option grants as if the fair-value-based method defined in
             SFAS No. 123 had been applied. During 2003, the Company adopted the
             fair value recognition provisions of SFAS No. 123, effective as of
             the beginning of the year. There have been no previous granting of
             options to employees and therefore this adoption has no effect on
             previous financial statements. See Note 12 for details of employee
             stock options issued during the year ended December 31, 2003.

                                      F-10
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         INCOME TAXES:
             Amounts provided for income tax expense are based on income
             reported for financial statement purpose and do not necessarily
             represent amounts currently payable under tax laws. Deferred taxes,
             which arise principally from temporary differences between the
             period in which certain income and expense items are recognized for
             financial reporting purposes and the period in which they affect
             taxable income, are included in the amounts provided for income
             taxes. Under this method, the computation of deferred tax assets
             and liabilities give recognition to the enacted tax rates in effect
             in the year the differences are expected to affect taxable income.
             Valuation allowances are established when necessary to reduce
             deferred tax assets to amounts that the Company expects to realize.

         RECLASSIFICATIONS
             Certain amounts in the financial statements for the prior period
             have been reclassified to conform to the current period's
             presentation.

2.  GOING CONCERN MATTERS
         The accompanying financial statements have been prepared on a going
         concern basis, which contemplates the realization of assets and the
         satisfaction of liabilities in the normal course of business. As shown
         in the financial statements during the years ended December 31, 2003,
         2002 and 2001, the Company incurred losses from operations of
         $3,979,341, $2,242,325, and $1,040,174 respectively. The financial
         statements do not include any adjustments relating to the
         recoverability and classification of liabilities that might be
         necessary should the Company be unable to continue as a going concern.
         It is management's plan to finance its operations for the foreseeable
         future primarily with proceeds from capital contributed by shareholders
         and to explore other financing options in the investment community. At
         December 31, 2003, no formal agreements had been entered into although
         management is negotiating licensing agreements with entities that have
         their own distributors that, if consummated, would generate operating
         revenues from the commercial sale of its loudspeakers directly to
         consumers. However, there can be no assurance that these sources will
         provide sufficient cash inflows to enable the Company to achieve its
         operational objectives.

                                      F-11
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

3.  LONG TERM DEBT AND NOTES PAYABLE
         Long term debt and notes payable consists of the following at December
         31, 2003 and 2002:
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                                 2003       2002
                                                                               --------   --------
<S>                                                                            <C>        <C>
         Note payable to individual, interest rate of 10% uncollateralized,
         principal payable on demand. Interest paid monthly                    $     --   $ 50,000

         Note payable to Individual, interest rate of 7% uncollateralized,
         principal payable on demand. Interest paid monthly                          --      5,000

         Notes payable to individuals, interest rate of 7% uncollateralized,
         principal past due. Interest accrued                                    25,000    357,633

         Equipment note, payments in monthly installments of $407
         beginning Oct. 2003, ending Sept. 2008.  Interest at 5.16%              19,877         --

         Vehicle note, payments in monthly installments of
         $518 beginning June 1999, ending April 2003. Interest at 8.75%              --      2,087
                                                                               --------   --------
                                                                                 44,877    414,720
         Less current portion                                                    28,946    414,720
                                                                               --------   --------
         Long-term portion                                                     $ 15,931   $     --
                                                                               ========   ========
</TABLE>

         The aggregate principal amounts due in the future are as follows:
         $28,946 in 2004, $4,154 in 2005, $4,374 in 2006, $4,605 in 2007, and
         $2,798 in 2008.

         Interest expense accrued on long-term debt was $5,763 and $65,366 in
         the years ended December 31, 2003 and 2002.

4.  COMMITMENTS
         Rent expense for operating leases was approximately $62,150, $56,400
         and $33,425 for the years ended December 31, 2003, 2002 and 2001. The
         current lease expires on August 31, 2004. Future minimum lease
         commitments under non-cancelable leases are as follows: $53,200 for
         2004.

                                      F-12
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

5.  INCOME TAXES
         The Company does not have an income tax provision in 2003, 2002 and
         2001. The Company has loss carryforwards of approximately $5,485,000
         expiring from 2011 to 2017.

         Deferred tax is comprised of the following:

         Non-current asset:            2003            2002          2001
                                    -----------    -----------    ---------
          Net operating loss        $ 1,864,900    $ 1,123,700    $ 763,800
         Valuation allowance        (1,864,900)    (1,123,700)    (763,800)
                                   -----------    -----------    ---------
         Total deferred tax, net            --             --           --
                                   ===========    ===========    =========

        A percent reconciliation of the provision for income taxes to the
statutory federal rate is as follows:

                                               2003     2002     2001
                                              -----    -----    -----
         Statutory federal income tax rate    (34.0%)  (34.0%)  (34.0%)
         Non deductible expense                15.3%    17.0%     2.0%
         Change in valuation allowance         18.7%    17.0%    32.0%
                                              -----    -----    -----
         Effective tax rate                     0.0%     0.0%     0.0%
                                              =====    =====    =====

6.  RELATED PARTY TRANSACTIONS
         The Company rents equipment owned by a shareholder for a rental fee. In
         2003, 2002 and 2001, the Company collected $0, $1,740 and $5,154 in
         rent for the shareholder. Company revenue from the rental totaled
         approximately $0, $174 and $515 for the years ended December 31, 2003,
         2002 and 2001.

         On January 18, 2002, the Company borrowed $5,000 from a friend of the
         president of the Company. The note is a demand note and bears interest
         at 7%. Monthly interest payments totaling $175 and $322 were paid in
         the years ended December 31, 2003 and 2002. The note was repaid in full
         on June 17, 2003. The note balance on December 31, 2003 was $0.

         On November 13, 2002, the Company borrowed $50,000 from a friend of the
         president of the Company. The note is a demand note and bears interest
         at 10%. Monthly interest payments totaling $2,500 and $444 were paid in
         the years ended December 31, 2003 and 2002. The note was repaid in full
         on July 18, 2003. The note balance on December 31, 2003 was $0.

         On November 20, 2002 the Company sold a truck to an officer and
         shareholder for $5,900. The truck's cost was $16,351 and had been fully
         depreciated. The transaction is reflected in the December 31, 2002
         financial statements as a gain from sale of assets of $5,900.

                                      F-13
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         There was an amount due from a shareholder of $511 as of December 21,
         2003. There was an amount due to a shareholder of $23,193 and $31,886
         as of December 31, 2002 and 2001. Amounts owed by or to shareholders to
         the Company are charged or credited interest.

7.  MAJOR CUSTOMERS AND SUPPLIERS
         In 2003, the Company received approximately 32% of its revenue from
         five customers with the largest customer accounting for 16% of total
         revenue. The Company purchased approximately 87% of the cost of sales
         from five vendors with the largest two vendors accounting for 55% of
         total cost of sales.

         In 2002, the company received approximately 29% of its revenue from
         four customers. The company purchased approximately 21% of the cost of
         sales from three vendors.

         In 2001, the company received approximately 40% of its revenue from
         four customers. The company purchased approximately 25% of the cost of
         sales from three vendors.

8.  STOCKHOLDERS' EQUITY

    Year ended December 31, 2001:

         In May, 2001, the Company sold 4,000,000 shares of common stock for
         $1,000,000 in a public offering. There were charges of $80,315 relating
         to the offering. These expenses have offset contributed capital.
         Included with the purchase of the shares was a Class A warrant and a
         Class B warrant. The Class A warrants expiration date has been extended
         to August 5, 2004 and are exercisable at a price of $0.50 per share.
         The Class B warrants have a term of 2 years and can be exercisable at a
         price of $3.00 per share. The B warrants expiration date has been
         extended to August 5, 2004. The warrants are detachable from the common
         stock but are not separable from each other until the Class A warrant
         is exercised.

         In May through December, 2001, 788,000 Class A warrants were exercised
         for 788,000 shares of common stock for a total of $394,000. 3,212,000
         Class A warrants are outstanding as of December 31, 2001. No Class B
         warrants have been exercised as of December 31, 2001.

         In fiscal 2001, the Company sold 102,000 shares of preferred stock,
         series A, for $255,000. At December 31, 2002, the preferred stock
         certificates had not been issued and are therefore stated in these
         financial statements as preferred stock not issued but owed to buyers.
         The shares were issued in the year ended December 31, 2003 and are
         therefore not shown as being owed at year end. This preferred stock
         contained a beneficial conversion feature. The feature allows the
         holder to convert the preferred to 10 shares of common stock one year
         after buying the shares. A discount on preferred shares of $191,400
         relating to the beneficial conversion feature was recorded which is
         amortized over a one year period beginning with the date the


                                      F-14
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         shareholders purchased their shares. As of December 31, 2001, $24,706
         has been amortized to retained earnings. At December 31, 2001, the
         unamortized discount on preferred shares was $166,694.

    Year ended December 31, 2002:

         In 2002, 101,000 Class A warrants were exercised for 101,000 shares of
         common stock for a total of $50,500. As of December 31, 2002 and 2003,
         2,000 shares had not been issued and are thereby shown in these
         financial statements as stock not issued but owed to buyers. 3,111,000
         Class A warrants are outstanding as of December 31, 2002. No Class B
         warrants have been exercised as of December 31, 2002.

         In fiscal 2002, the Company sold 315,000 shares of preferred stock,
         series A, for $787,500. As of December 31, 2002, the preferred stock
         certificates had not been issued and are therefore stated in these
         financial statements as preferred stock not issued but owed to buyers.
         The shares were issued in the year ending December 31, 2003 and are
         therefore not shown as being owed at year end. This preferred stock
         contained a beneficial conversion feature. The feature allows the
         holder to convert the preferred to 10 shares of common stock one year
         after buying the shares. A discount on preferred shares of $618,700
         relating to the beneficial conversion feature was recorded which is
         amortized over a one year period beginning with the date the
         shareholders purchased their shares. As of December 31, 2002 and 2001,
         $552,100 and $24,706 has been amortized to retained earnings. At
         December 31, 2002, the unamortized discount on preferred shares was
         $233,294.

         In the fourth quarter of 2002, 102,000 shares of preferred stock,
         series A, were converted to 1,020,000 shares of common stock. As of
         December 31, 2002, the shares had not been issued and are therefore
         reflected in these financial statements as common stock not issued but
         owed to buyers. The shares were subsequently issued in February of
         2003.

         In January of 2002, an agreement was signed with Office Radio Network
         for consulting services to be performed from January 5, 2002 to January
         5, 2003. As compensation for consulting services, the Company gave
         Office Radio Network $15,000 and issued 150,000 shares of common stock.
         The shares of common stock were issued on November 19, 2002. Using the
         market value on the date the agreement was signed, the shares were
         valued at $111,000 and recorded as a debit in the equity section of the
         balance sheet as unamortized cost of stock issued for services. The
         expense is amortized over the one year period of the agreement.
         Consulting expense relating to this agreement was $109,612 for the year
         ended December 31, 2002. On December 31, 2002, there was $1,388
         remaining in unamortized cost of stock issued for services on the
         balance sheet. Consulting expense relating to this agreement was $1,388
         for the year ended December 31, 2003. On December 31, 2003 there was no
         remaining amount in unamortized cost of stock issued for services for
         this agreement.

                                      F-15
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         In January of 2002, three agreements were signed for consulting
         services to be performed. The agreements paid 300,000 shares to the
         consultants in exchange for $3,000, an executed note receivable for
         $27,000, and services to be rendered. 100,000 of the common shares were
         issued on November 19, 2002. The remaining 200,000 shares have not been
         issued as of December 31, 2002 and are therefore reflected in the
         financial statements as common stock not issued but owed to buyers. The
         remained 200,000 shares were issued during the year ended December 31,
         2003. Using the market value on the date the agreements were signed,
         the shares were valued at $237,000. Value of the shares over
         consideration given is $207,000 and is recorded as a debit in the
         equity section of the balance sheet as unamortized cost of stock issued
         for services. A valuation allowance of $27,000 has been used to offset
         the resulting note receivable from the transaction and therefore $0 is
         reflected in the asset section of the balance sheet for the note
         receivables. The expense is amortized over a one year period.
         Consulting expense relating to these agreements was $198,210 for the
         year ended December 31, 2002. On December 31, 2002 there was $8,790
         remaining in unamortized cost of stock issued for services on the
         balance sheet. Consulting expense relating to these agreements was
         $8,790 for the year ended December 31, 2003. On December 31, 2003 there
         was no remaining amount in unamortized cost of stock issued for
         services for this agreement.

         In April of 2002, an agreement was signed with The Equitable Group, LLC
         for consulting services to be performed from March 26, 2002 to
         September 26, 2002. As compensation for consulting services, the
         Company agreed to issue 600,000 shares of common stock, of which
         100,000 were nonrefundable, to the consultant. The Company issued
         100,000 shares on April 9, 2002. Using the market value on the date the
         agreement was signed, the shares were valued at $51,000 and recorded as
         a debit in the equity section of the balance sheet as unamortized cost
         of stock given for services. On May 2, 2002, the Company terminated the
         agreement. Upon termination of the agreement all unamortized costs were
         amortized as consulting expense. Consulting expense relating to this
         agreement was $51,000 for the year ended December 31, 2002. On December
         31, 2002 there was $0 remaining in unamortized cost of stock issued for
         services on the balance sheet.

         In April of 2002, an agreement was signed with Muir, Crane, & Co. for
         consulting services to be performed April 2, 2002 to April 2, 2003. As
         compensation for consulting services the Company agreed to pay a
         retainer of $4,000 per month and issue 200,000 shares of common stock.
         100,000 shares were issued on April 9, 2002 and 100,000 shares were
         issued on July 18, 2002. Using the market value on the date the
         agreement was signed, the shares were valued at $95,000 and recorded as
         a debit in the equity section of the balance sheet as unamortized cost
         of stock issued for services. At December 31, 2002, the consulting
         agreement had been terminated and all costs were amortized. Consulting
         expense relating to this agreement was $95,000 for the year ended
         December 31, 2002. On December 31, 2002 there was $0 remaining in
         unamortized cost of stock issued for services. Due to the cancellation


                                      F-16
<PAGE>

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         of the agreement, the Company entered litigation and in February of
         2004 paid $35,000 to settle the case (See Note 12).

         In April of 2002, an agreement was signed with Sam Hamra for consulting
         services to be performed April 18, 2002 to April 18, 2003. As
         compensation for consulting services the Company agreed to issue 70,000
         shares of common stock. 70,000 shares of common stock were issued on
         April 18, 2002. Using the market value on the date the agreement was
         signed, the shares were valued at $39,200 and recorded as a debit in
         the equity section of the balance sheet as unamortized cost of stock
         issued for services. As compensation, Mr. Hamra was also issued options
         to purchase 100,000 shares of preferred stock at a strike price of
         $2.50 per share. This preferred stock was convertible into 1,000,000
         shares of common stock after a period of one year. The options expire
         when the preferred stock offering closes. The closing date was July 31,
         2003. Using the Black-Scholes pricing model, the options were valued at
         $311,222 and recorded as a debit in the equity section of the balance
         sheet as unamortized cost of stock issued for services. At December 31,
         2002, the consulting agreement had been terminated and all costs were
         amortized. Consulting expense relating to this agreement was $350,517
         for the year ended December 31, 2002. On December 31, 2002 there was $0
         remaining in unamortized cost of stock issued for services.

         In June of 2002, an agreement was signed with Liquid Solutions Corp.
         for consulting services to be performed June 10, 2002 to September 10,
         2002. As compensation for consulting services the Company agreed to
         issue 500,000 shares of common stock. 500,000 shares of common stock
         were issued on June 19, 2002. Using the market value on the date the
         agreement was signed, the shares were valued at $155,000 and recorded
         as a debit in the equity section of the balance sheet as unamortized
         cost of stock issued for services. The expense is amortized over the
         three months of the agreement. Consulting expense relating to this
         agreement was $155,000 for the year ended December 31, 2002. On
         December 31, 2002 there was $0 remaining in unamortized cost of stock
         issued for services.

         In August of 2002, an agreement was signed with Atlantic Services,
         Ltd., a foreign corporation based in Costa Rica, for consulting
         services to be performed August 15, 2002 to August 15, 2003. As
         compensation for consulting services the Company agreed to issue
         125,000 shares of common stock. 125,000 shares of common stock were
         issued on August 15, 2002. Using the market value on the date the
         agreement was signed, the shares were valued at $43,750 and recorded as
         a debit in the equity section of the balance sheet as unamortized cost
         of stock issued for services. The expense is amortized over the one
         year period of the agreement. Consulting expense relating to this
         agreement was $16,625 for the year ended December 31, 2002. On December
         31, 2002 there was $27,125 remaining in unamortized cost of stock
         issued for services. Consulting expense relating to this agreement was
         $27,125 for the year ended December 31, 2003. On December 31, 2003,
         there was no remaining amount in unamortized cost of stock issued for
         services for this agreement.

                                      F-17
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         In September of 2002, an agreement was signed with Art Malone, Jr. for
         consulting services to be performed September 10, 2002 to March 10,
         2003. As compensation for consulting services the Company agreed to
         issue 250,000 shares of common stock upon signing of the agreement and
         another 250,000 shares upon the consummation or signing of a celebrity
         brought directly or indirectly by Mr. Malone as an endorser. 250,000
         shares of common stock were issued on September 17, 2002. As of
         December 31, 2002 and 2003 no other shares have been issued in regards
         to this agreement. Using the market value on the date the agreement was
         signed, the shares were valued at $60,000 and recorded as a debit in
         the equity section of the balance sheet as unamortized cost of stock
         issued for services. The expense is amortized over the six month period
         of the agreement. Consulting expense relating to this agreement was
         $37,200 for the year ended December 31, 2002. On December 31, 2002
         there was $22,800 remaining in unamortized cost of stock issued for
         services. Consulting expense relating to this agreement was $22,800 for
         the year ended December 31, 2003. On December 31, 2003 there was no
         remaining balance in unamortized cost of stock issued for services for
         this agreement.

         In October of 2002, an agreement was signed with Patrick Armstrong of
         Titan Entertainment Group for consulting services to be performed
         November 5, 2002 to November 5, 2003. As compensation for consulting
         services the Company agreed to issue 100,000 shares of common stock and
         250,000 options for 250,000 shares of common stock. The options have a
         strike price of $.30 and expire ten years from date of issuance.
         100,000 shares of common stock were issued on November 5, 2002. Using
         the market value on the date the agreement was signed, the shares were
         valued at $39,000 and recorded as a debit in the equity section of the
         balance sheet as unamortized cost of stock issued for services. Using
         the Black-Scholes pricing model, the options were valued at $57,471 and
         recorded as a debit in the equity section of the balance sheet as
         unamortized cost of stock issued for services. All costs will be
         amortized over the one year period of the agreement. Consulting expense
         relating to this agreement was $17,010 for the year ended December 31,
         2002. On December 31, 2002 there was $79,461 remaining in unamortized
         cost of stock issued for services. Consulting expense relating to this
         agreement was $79,461 for the year ended December 31, 2003. On December
         31, 2003 there were no remaining amounts in unamortized cost of stock
         issued for services for this agreement.

         In October of 2002, an agreement was signed with Larry Stessel of Titan
         Entertainment Group for consulting services to be performed November 5,
         2002 to November 5, 2003. As compensation for consulting services the
         Company agreed to issue 100,000 shares of common stock and 250,000
         options for 250,000 shares of common stock. The options have a strike
         price of $.30 and expire ten years from date of issuance. 100,000
         shares of common stock were issued on November 5, 2002. Using the
         market value on the date the agreement was signed, the shares were
         valued at $39,000 and recorded as a debit in the equity section of the
         balance sheet as unamortized cost of stock issued for services. Using
         the Black-Scholes pricing model, the options were valued at $57,471 and
         recorded as a debit in the equity section of the balance sheet as
         unamortized cost of stock issued for services. All costs will be


                                      F-18
<PAGE>

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         amortized over the one year period of the agreement. Consulting expense
         relating to this agreement was $17,010 for the year ended December 31,
         2002. On December 31, 2002 there was $79,461 remaining in unamortized
         cost of stock issued for services. Consulting expense relating to this
         agreement was $79,461 for the year ended December 31, 2003. On December
         31, 2003 there was no remaining amount in unamortized cost of stock
         issued for services for this agreement.

         In December of 2002, an agreement was signed with Atlantic Services,
         Ltd., a foreign corporation based in Costa Rica, for consulting
         services to be performed December 2, 2002 to June 2, 2003. As
         compensation for consulting services the Company agreed to issue
         300,000 shares of common stock and the president of the Company agreed
         to issue 300,000 options to purchase 300,000 shares of common stock
         owned by him personally. The options have a strike price of $.05 and
         expire 30 days after the current lock-up period ends on the president's
         shares. 300,000 shares of common stock were issued on December 9, 2002.
         Using the market value on the date the agreement was signed, the shares
         were valued at $114,000 and recorded as a debit in the equity section
         of the balance sheet as unamortized cost of stock issued for services.
         Using the Black-Scholes pricing model, the options were valued at
         $99,099 and recorded as a credit to additional paid in capital - common
         stock and a debit in the equity section of the balance sheet as
         unamortized cost of stock issued for services. The cost is amortized
         over the six month period of the agreement. Consulting expense relating
         to this agreement was $21,807 for the year ended December 31, 2002. On
         December 31, 2002 there was $191,292 remaining in unamortized cost of
         stock issued for services. Consulting expense relating to this
         agreement was $191,292 for the year ended December 31, 2003. On
         December 31, 2003 there was no remaining amount in unamortized stock
         issued for services for this agreement.

         In December 2002, an agreement was signed with Worldwide Financial
         Marketing, Inc. for consulting services to be performed December 15,
         2002 to December 15, 2003. As compensation for consulting services the
         Company agreed to issue 300,000 shares of common stock. 300,000 shares
         of common stock were issued on December 13, 2002. Using the market
         value of the date the agreement was signed, the shares were valued at
         $120,000 and recorded as a debit in the equity section of the balance
         sheet as unamortized cost of stock issued for services. The cost is
         amortized over the one year period of the agreement. Consulting expense
         relating to this agreement was $5,333 for the year ended December 31,
         2002. On December 31, 2002 there was $114,667 remaining in unamortized
         cost of stock issued for services. Consulting expense relating to this
         agreement was $114,667 for the year ended December 31, 2003. On
         December 31, 2003 there was no remaining amount in unamortized stock
         issued for services for this agreement.

                                      F-19
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

    Year ended December 31, 2003:

         In 2003, 1,966,000 Class A warrants were exercised for 1,966,000 shares
         of common stock for a total of $983,000. Also in 2003, 394,600 Class A
         warrants were exercised for 394,600 shares of common stock for services
         rendered (See Note 10). As of December 31, 2003, 2,000 shares had not
         been issued and are thereby shown in these financial statements as
         stock not issued but owed to buyers. 750,400 Class A warrants are
         outstanding as of December 31, 2003. The expiration date of the Class A
         warrants has been extended to August 5, 2004.

         In 2003, 16,600 Class B warrants were exercised for 16,600 shares of
         common stock for a total of $49,800. 3,983,400 Class B warrants are
         outstanding as of December 31, 2003. The expiration date of the Class B
         warrants has been extended to August 5, 2004.

         In 2003, 260,000 options were exercised for 260,000 shares of common
         stock for a total of $65,000. As of December 31, 2003, 181,000 shares
         had not been issued and are thereby shown in these financial statements
         as stock not issued but owed to buyers.

         In fiscal 2003, the Company sold 1,468,300 shares of preferred stock,
         series A, for $3,670,750. The preferred stock offering closed on July
         31, 2003. This preferred stock contained a beneficial conversion
         feature. The feature allows the holder to convert the preferred to 10
         shares of common stock one year after buying the shares. A discount on
         preferred shares of $3,451,720 relating to the beneficial conversion
         feature was recorded which will be amortized over a one year period
         beginning with the date the shareholders purchased their shares. As of
         December 31, 2003, 2002 and 2001, $1,798,438, $552,100 and $24,706 has
         been amortized to retained earnings. At December 31, 2003, the
         unamortized discount on preferred shares was $1,866,576.

         During 2003, 238,000 shares of preferred stock, series A, were
         converted to 2,380,000 shares of common stock.

         In February 2003, an agreement was signed with Tom Puccio for
         consulting services to be performed February 15, 2003 to August 25,
         2003. As compensation for consulting services the Company agreed to
         issue 300,000 shares of common stock. 300,000 shares of common stock
         were issued on February 25, 2003. Using the market value of the date
         the agreement was signed, the shares were valued at $93,000 and
         recorded as a debit in the equity section of the balance sheet as
         unamortized cost of stock issued for services. The cost is amortized
         over the six month period of the agreement. Consulting expense relating
         to this agreement was $93,000 for the year ended December 31, 2003. On
         December 31, 2003 there was no remaining amount in unamortized stock
         issued for services for this agreement.

         In July 2003, the Company entered into an endorsement agreement with
         the recording artist Sting through Steerpike Ltd. The agreement grants


                                      F-20
<PAGE>

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         1,100,000 options in exchange for future endorsements of SLS products.
         Each option is convertible into one share of common stock at a strike
         price of $0.25 and is exercisable for a period of five years. Expense
         associated with the options will be recorded over the two year period
         of the agreement beginning July 31, 2003 and ending July 31, 2005.
         Expense will be recorded at fair market value, using the Black-Scholes
         pricing model, on an accelerated method, thereby recording a larger
         portion of the costs in the earlier months of the two year period.
         Consulting expense relating to this agreement was $1,142,432 for the
         year ended December 31, 2003. Expenses to be recorded in the periods
         ended December 31, 2004 and 2005 are unknown at this time because they
         are partly based on the market price over those periods. As of December
         31, 2003 approximately 620,000 of the 1,100,000 options have been
         earned and expensed.

         In October 2003, an agreement was signed with Zane Sellis for
         consulting services to be performed October 28, 2003 to October 28,
         2005. As compensation for consulting services the Company agreed to
         issue 3,226 shares of common stock. 3,226 shares of common stock were
         issued on December 1, 2003. Using the market value of the date the
         agreement was signed, the shares were valued at $5,162 and recorded as
         a debit in the equity section of the balance sheet as unamortized cost
         of stock issued for services. The cost is amortized over the two year
         period of the agreement. Consulting expense relating to this agreement
         was $453 for the year ended December 31, 2003. On December 31, 2003
         there was $4,709 remaining in unamortized stock issued for services for
         this agreement.

         In November 2003, an agreement was signed with George Iordanou for
         consulting services to be performed November 6, 2003 to November 6,
         2005. As compensation for consulting services the Company agreed to
         issue 3,226 shares of common stock. 3,226 shares of common stock were
         issued on December 1, 2003. Using the market value of the date the
         agreement was signed, the shares were valued at $4,774 and recorded as
         a debit in the equity section of the balance sheet as unamortized cost
         of stock issued for services. The cost is amortized over the two year
         period of the agreement. Consulting expense relating to this agreement
         was $360 for the year ended December 31, 2003. On December 31, 2003
         there was $4,415 remaining in unamortized stock issued for services for
         this agreement.

         In November 2003, an agreement was signed with William Fischbach for
         consulting services to be performed November 10, 2003 to November 10,
         2006. As compensation for consulting services the Company agreed to
         issue 400,000 shares of common stock. 400,000 shares of common stock
         were issued on November 11, 2003. Using the market value of the date
         the agreement was signed, the shares were valued at $780,000 and
         recorded as a debit in the equity section of the balance sheet as
         unamortized cost of stock issued for services. The cost is amortized
         over the three year period of the agreement. Consulting expense
         relating to this agreement was $36,329 for the year ended December 31,
         2003. On December 31, 2003 there was $743,671 remaining in unamortized
         stock issued for services for this agreement. The agreement also calls
         for the issuance of options, not to exceed an aggregate of 800,000, to
         Mr. Fischbach on January 1 or each year based on the previous year's


                                      F-21
<PAGE>

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         performance levels. No options were issued on January 1, 2004 under
         this agreement. The agreement also calls for additional compensation to
         Mr. Fischbach in the form of a cash fee of 2% of the dollar amount of
         value provided in a merger, acquisition, or other transaction resulting
         directly from Mr. Fischbach's services. As of December 31, 2003, no
         cash fee has been paid.

         In November 2003, an agreement was signed with Edward Decker for
         consulting services to be performed November 20, 2003 to November 20,
         2005. As compensation for consulting services the Company agreed to
         issue 7,000 shares of common stock. 7,000 shares of common stock were
         issued on December 1, 2003. Using the market value of the date the
         agreement was signed, the shares were valued at $15,050 and recorded as
         a debit in the equity section of the balance sheet as unamortized cost
         of stock issued for services. The cost is amortized over the two year
         period of the agreement. Consulting expense relating to this agreement
         was $845 for the year ended December 31, 2003. On December 31, 2003
         there was $14,205 remaining in unamortized stock issued for services
         for this agreement.

         In November 2003, an agreement was signed with Christoper Obssuth for
         consulting services to be performed November 20, 2003 to November 20,
         2005. As compensation for consulting services the Company agreed to
         issue 7,000 shares of common stock. 7,000 shares of common stock were
         issued on December 1, 2003. Using the market value of the date the
         agreement was signed, the shares were valued at $15,050 and recorded as
         a debit in the equity section of the balance sheet as unamortized cost
         of stock issued for services. The cost is amortized over the two year
         period of the agreement. Consulting expense relating to this agreement
         was $845 for the year ended December 31, 2003. On December 31, 2003
         there was $14,205 remaining in unamortized stock issued for services
         for this agreement.

9.  UNAMORTIZED COST OF STOCK ISSUED FOR SERVICES
        As detailed in Note 8, during the years ended December 31, 2003 and
        2002, the Company issued or agreed to issue 3,215,452 shares of common
        stock, granted 500,000 options for common stock, and 100,000 options for
        preferred stock as part of consulting agreements. The value of stock
        issued and options granted totaled $913,036 and $1,599,213 for the years
        ended December 31, 2003 and 2002. This cost is recorded as a debit in
        the equity section of the balance sheet as unamortized cost of stock
        issued for services. The balance is amortized into consulting expense
        over the lives of the various consulting agreements. For the year ended
        December 31, 2003 and 2002, $656,816 and $1,074,229 were amortized into
        consulting expense. Unamortized cost of stock issued for services was
        $524,984 as of December 31, 2002 and $781,204 as of December 31, 2003.
        There was no stock issued for services in the year ended December 31,
        2001.

                                      F-22
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

10.  CONSULTING AND INVESTOR RELATIONS SERVICES
         Consulting and investor relation services expense was $3,104,153,
         $1,303,770, and $52,799 for the years ended December 31, 2003, 2002,
         and 2001. Consulting and investor relation expenses incurred in 2003,
         2002, and 2001 are detailed below.

         Consulting expenses relating to stock issued for consulting agreements
         was $656,816, $1,074,229, and $0 (See Note 9) in the years ended
         December 31, 2003, 2002, and 2001 and relating to options issued for
         services was $1,142,432, $0, and $0 (See Note 8) for the years ended
         December 31, 2003, 2002, and 2001.

         Ronald Gee contracted with SLS for promotional services and was paid
         $335,000 to disseminate information pursuant to the Company's
         obligation under the Exchange Act. All services were rendered in the
         third and fourth quarter of the year ended December 31, 2003.

         Atlantic Services Ltda, DBA Atlantic Services and Phantasma Holding
         Corp/Red Sea Mgt. Located in Costa Rica contracted with SLS and was
         paid $100,000 to provide SLS consultation and to identify and introduce
         companies/individuals that may be potential agents, partners,
         distributors, spokespeople and/or investors. All services were rendered
         in the third quarter of the year ended December 31, 2003.

         Berkshire International LLC DBA Phantasma Holding Corp/Berkshire
         located in Costa Rica contracted with SLS to provide the services of
         business development to identify and introduce companies that may be
         potential partners, support in the implementation of a marketing
         program and to promote the image of the Company and was paid $150,000.
         The term of the agreement was from August 11 to November 11, 2003.

         Fitzgerald Galloway contracted with SLS to identify private or public
         companies for merger and/or acquisition with or by SLS for a period
         from July 23, 2003 to August 23, 2003 and was paid a fee of $20,000.

         Wall Street Investor Relations Corp contracted with SLS for public
         relations, investor relations and capital raising for a period
         completed by September 30, 2003 and received a fee of $8,000.

         G. Ghecko Enterprises DBA Red Sea Management, located in Costa Rica,
         contracted with SLS and was paid $50,000 to provide SLS consultation
         and the service of business development to identify and introduce
         companies that may be potential partners. The contract was later voided
         and a refund of $50,000 was received in January 2004.

         Art Malone, Jr. provided services for the purpose of securing the
         appropriate mechanisms to market SLS's products for a fee of $15,000.
         The services were from September 1, 2003 to December 31, 2003.

                                      F-23
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         Bill Fischbach provided services for the purpose of public relations,
         retail distribution contacts, and business development to the Company
         for a fee of $78,870. The services were rendered in the third quarter
         of 2003.

         Various individuals and corporations performed consulting services and
         investor relation services for the Company during the year ended
         December 31, 2003, 2002, and 2001 and were paid $498,035, $229,541, and
         $52,799.

11.  STOCK OPTION PLAN
         On July 1, 2000, the Board of Directors approved a stock option plan.
         The plan covers all eligible employees and is an incentive stock option
         plan. The number of shares that can be issued under the plan total
         2,000,000. There were no options issued in 2001. In 2002, the Company
         granted 500,000 options for common stock as part of consulting
         agreements detailed in Note 8. In 2003, the Company issued 1,100,000
         options for common stock as part of consulting agreements detailed in
         Note 8. The Company accounts for these grants under Accounting
         Principles Board Opinion No. 25 under which expense has been recognized
         for services. There were no options granted in the year ended December
         31, 2001. The following table summarizes the options granted:
<TABLE>
<CAPTION>
                                                          2002            2003
                                                     --------------    -----------
         <S>                                         <C>               <C>
         Dividend Yield                                          0%             0%
         Weighted Average Expected Stock Volatility             29%        146.60%
         Weighted Average Risk Free Interest Rate             2.70%          3.46%
         Expected Option Lives                       6 months to 10        5 years
                                                              years
         Value of Options Granted                          $426,164    $1,142,432*
</TABLE>

         *Only options earned in 2003 are valued here. Options to be earned in
         2004 and 2005 have not been valued as they will be valued on the date
         they are earned. See Note 8.
<TABLE>
<CAPTION>
                                                          Weighted               Weighted
                             Options             2003      Average      2002      Average
                             -------          ---------   --------    -------    --------
         <S>                                  <C>           <C>       <C>         <C>
         Outstanding at beginning of year       500,000     $0.30          --        --

         Granted                              1,100,000      0.25     500,000     $0.30

         Exercised                              260,000      0.25          --        --

         Expired                                     --      -             --        --
                                              ---------     -----     -------     -----

         Outstanding at end of year           1,340,000     $0.27     500,000     $0.30
                                              =========     =====     =======     =====
</TABLE>

                                      F-24
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         The weighted average exercise price of the options is $0.27 at December
         31, 2003.

12. EMPLOYEE STOCK OPTIONS
         During the year ended December 31, 2003, the Company adopted the fair
         value recognition provisions of FASB Statement No. 123, Accounting for
         Stock-Based Compensation, effective as of the beginning of the year.
         There have been no previous granting of options to employees and
         therefore this adoption has no effect on previous financial statements.

         The board of directors approved 145,000 options for employees and
         directors in the year ended December 31, 2003. The options vested
         immediately. 10,000 options were approved for each of three board
         members for their roles as directors of the company. 115,000 options
         were approved for employees of the Company for services rendered. Using
         the Black-Scholes pricing model, in accordance with the fair value
         recognition provision of FASB Statement No. 123, the options were
         valued at $23,134 and recorded as compensation expense in the year
         ended December 31, 2003. There were no employee stock options in the
         years ended December 31, 2002 or 2001.

         The following table summarizes the options granted:

             Dividend Yield                                                   0%
             Weighted Average Expected Stock Volatility                    52.5%
             Weighted Average Risk Free Interest Rate                      4.04%
             Expected Option Lives                                      10 years
             Value of Options Granted                                    $23,134

                                                                   Weighted
                                       Options           2003       Average
                                       -------         -------     --------
                  Outstanding at beginning of year          --          --

                  Granted                              145,000       $0.25

                  Exercised                                 --          --

                  Expired                                   --          --
                                                       -------       -----


                  Outstanding at end of year           145,000       $0.25
                                                       =======       =====

         The weighted average exercise price of the options is $0.25 at December
         31, 2003.



                                      F-25
<PAGE>
SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

13. SUBSEQUENT EVENTS
         In February of 2004, the Class A and Class B warrants expiration dates
         were both extended to August 5, 2004.

         From January 1 to March 26, 2004, 175,200 Class A warrants were
         exercised for 175,200 shares of common stock for a total of $87,600.

         From January 1 to March 26, 2004, 19,940 shares of preferred stock,
         series A, were converted into 199,400 shares of common stock.

         In January of 2004, 181,000 shares of common stock owed to buyers at
         December 31, 2003 were issued.

         In March of 2004, the Company commenced an offering of Series B
         preferred stock. 1,000,000 shares of preferred stock, series B, is
         being offered at $20.00 per share. Each share is convertible into ten
         shares of the Company's common stock six months after purchase. Prior
         to conversion, the shares have no voting rights. Attached to each
         preferred share are ten of the Company's class C warrants. Each Class C
         warrant has a term of three years and provides the right to purchase
         one share of the Company's common stock at $7.00 per share. The Class C
         warrants are immediately exercisable and detachable from the preferred
         share. If the average closing market price for the Company's common
         stock is equal to or greater than $10.50 for a period of 30 days, then
         such warrants are capable of being repurchased by the Company, with
         30-day notice, at a price of $.001 per warrant.

         Through March 26, 2004, 143,500 shares of the preferred stock, series
         B, have been sold for $2,870,000.

         In February of 2004, the Company settled a lawsuit brought by an entity
         that had previously been a consultant to the Company. The settlement
         amount of $35,000 has been accrued in the financial statements for the
         year ended December 31, 2003.

         In March of 2004, the Company settled a lawsuit brought by a former
         consultant to the Company. The former consultant returns 100,000 shares
         of common stock of the Company for cancellation in exchange for
         $250,000 payable in March and April of 2004. This settlement has not
         been accrued in the financial statements for the year ended December
         31, 2003.

         In February of 2004, the Company entered into an agreement with the
         owners of SA Sound B.V. and SA Sound USA, Inc. giving the Company an
         option to acquire said companies at any time prior to February 27, 2004
         for a purchase price of 370,000 euros, approximately $467,000. The
         Company paid 50,000 euros, approximately $63,000 for this option. The
         option agreement entitled the Company to a refund of the option price
         if the due diligence performed by the Company disclosed any material
         adverse facts about said companies. After completion of the due
         diligence, the Company determined not to exercise the option to
         purchase and has asserted its right to a refund of the option price.


                                      F-26
<PAGE>

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

         The sellers are challenging the return of the option price. None of the
         above items or amounts have been reflected in the financial statements
         as of December 31, 2003.

         In March of 2004, the Company completed a merger with Evenstar, Inc.
         into a newly formed, wholly owned subsidiary. In exchange for said
         merger, the Company paid $300,000 in cash and issued 300,000 shares of
         common stock to the seller. Based on market value of the common stock
         on the date of closing and the cash given, the purchase price was
         approximately $1,160,000. Simultaneously with the merger, the Company
         hired the seller as director of its electronics division and issued the
         seller options to purchase 100,000 shares of common stock at market
         value on the day of merger closing. The seller is also entitled to
         annual options based on the amount of gross profits received from sales
         of products containing the technologies acquired from the merger.
         Evenstar, Inc has virtually no assets other than patents and has not
         shown any revenue for the past two years. The excess of the purchase
         price (approximately $1,160,000) over the cost of the patents
         (approximately $4,000, net of amortization) will be recorded as
         goodwill in the first quarter of 2004. Simultaneously, the Company will
         take a charge for impairment of goodwill of the same amount. The
         impairment charge will be recorded in the financial statements for the
         quarter ended March 31, 2004.

         In March of 2004, the Company issued 300,000 shares of common stock in
         relation to the Evenstar, Inc. merger.

         In the second quarter of 2004, the Company intends to make a rescission
         offer to all warrant holders who exercised warrants during the period
         from May 1, 2002 through the current period. During such period, the
         registration statement that the Company filed with the US Securities
         and Exchange Commission to register the common stock issuable upon
         exercise of the warrants may not have been "current" because it had not
         been amended to include the Company's most recent audited financial
         statements. As a result , the former warrant holders may be entitled to
         rescind their purchases and the Company has decided to make the
         rescission offer. Once made, the rescission offer is open for 30 days.
         The rescission offer would require the Company to purchase warrants
         back at their original exercise price, $.50 for the Class A warrants
         and $3.00 for the Class B warrants, at each warrant holder's option.
         The current market price is well above the $.50 exercise price of the
         Class A warrants so no adjustment to the financial statements for the
         year ended December 31, 2003 has been made for the rescission offer.
         The current market price is below the $3.00 exercise price of the Class
         B warrants. Only 16,600 Class B warrants have been exercised as of
         December 31, 2003, so any effect of the rescission offer would have an
         immaterial effect of these financial statements, therefore, no
         adjustment has been made. If all warrant holders accepted the
         rescission offer, the Company would be required to pay $1,246,800 plus
         interest, which amount would be reduced to the extent of the proceeds
         from any sales of the underlying common stock by the former warrant
         holders. Acceptance of the rescission offer by all former warrant
         holders could have a material adverse effect of these financial
         statements.


                                      F-27

<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER                     EXHIBIT                                                      WHERE LOCATED
------     -----------------------------------------------------------    ------------------------------------------------
<S>        <C>                                                            <C>
2.1        Plan of Reorganization                                         Exhibit 2 to Registration Statement on Form SB-2
                                                                          filed August 15, 2000

3.1        Articles of Incorporation                                      Exhibit 3(i) to Registration Statement on
                                                                          Form SB-2 filed August 15, 2000

3.2        Amendment and Restatement of Certificate of                    Exhibit 3(ii) to Registration Statement on
           Incorporation                                                  Form SB-2 filed August 15, 2000

3.3        By-Laws                                                        Exhibit 3(iii) to Registration Statement on Form
                                                                          SB-2 filed August 15, 2000

3.4        Amendment to By-laws (Article VIII)                            Filed herewith

4.1        Specimen Certificate of Common Stock                           Exhibit 4(i) to Amendment No. 1 to Registration
                                                                          Statement on Form SB-2 filed December 1, 2000

4.2        Form of A Warrant                                              Exhibit 4(ii) to Registration Statement on Form
                                                                          SB-2 filed August 15, 2000

4.3        Form of B Warrant                                              Exhibit 4(iii) to Registration Statement on Form
                                                                          SB-2 filed August 15, 2000

10.1       Commercial Property Lease Agreement between Scenic             Exhibit 10.1 to Form 10-QSB for quarter ended
           Properties, Inc., and SLS International, Inc., dated           September 30, 2003, filed November 11, 2003
           September 1, 2003
10.2       Agreement dated February 24, 2000 between Igor Levitsky and    Exhibit 10(i) to Amendment No. 1 to Registration
           Sound and Lighting Specialists, Inc.                           Statement on Form SB-2 filed December 1, 2000

10.3       Assignment of Technology Rights by Igor Levitsky dated         Exhibit 10(iii) to Amendment No. 1 to
           November 9, 2000                                               Registration Statement on Form SB-2 filed
                                                                          December 1, 2000

10.4       Form of Distributor Agreement                                  Exhibit 10(iv) to Amendment No. 2 to
                                                                          Registration Statement on Form SB-2 filed January
                                                                          16, 2001

10.5       2000 Stock Purchase and Option Plan*                           Exhibit 99(i) to Registration Statement on Form
                                                                          SB-2 filed August 15, 2000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER                     EXHIBIT                                                      WHERE LOCATED
------     -----------------------------------------------------------    ------------------------------------------------
<S>        <C>                                                            <C>
10.6       Form of Option*                                                Exhibit 99(ii) to Registration Statement on Form
                                                                          SB-2 filed August 15, 2000

10.7       Letter Agreement, dated January 5, 2002 between                Exhibit 10.1 to Amendment No. 1 to
           SLS International, Inc. and Internet PR Group Inc.             Form 10-QSB for quarter ended March 31, 2002,
                                                                          filed May 21, 2003

10.8       Share Purchase Agreement, dated January 22, 2002               Exhibit 10.2 to Amendment No. 1 to
           between SLS International, Inc. and Herbie Herbert             Form 10-QSB for quarter ended March 31, 2002,
                                                                          filed May 21, 2003

10.9       Share Purchase Agreement, dated January 22, 2002               Exhibit 10.3 to Amendment No. 1 to
           between SLS International, Inc. and Thomas Panos               Form 10-QSB for quarter ended March 31, 2002,
                                                                          filed May 21, 2003

10.10      Consulting Agreement, dated April 9, 2002, between SLS         Exhibit 10.1 to Amendment No. 1 to
           International, Inc. and The Equitable Group, LLC               Form 10-QSB for quarter ended June 30, 2002,
                                                                          filed May 21, 2003
10.11      Letter Agreement, dated April 2, 2002, between SLS             Exhibit 10.2 to Amendment No. 1 to
           International, Inc. and Muir Crane & Co.                       Form 10-QSB for quarter ended June 30, 2002,
                                                                          filed May 21, 2003

10.12      Letter Agreement, dated April 18, 2002, between SLS            Exhibit 10.3 to Amendment No. 1 to
           International, Inc. and Sam F. Hamra                           Form 10-QSB for quarter ended June 30, 2002,
                                                                          filed May 21, 2003

10.13      Consulting Services Agreement, dated June 19, 2002, between    Exhibit 10.4 to Amendment No. 1 to
           SLS International, Inc. and Liquid Solutions Corp.             Form 10-QSB for quarter ended June 30, 2002,
                                                                          filed May 21, 2003

10.14      Letter Agreement, dated July 17, 2002, between SLS             Exhibit 10.1 to Amendment No. 1 to
           International, Inc. and Alfred V. Greco PLLC regarding         Form 10-QSB for quarter ended September 30, 2002,
           settlement  of Alfred V. Greco v. SLS International, Inc.      filed May 21, 2003

10.15      Letter Agreement, dated July 17, 2002, between SLS             Exhibit 10.2 to Amendment No. 1 to
           International, Inc. and Alfred V. Greco PLLC                   Form 10-QSB for quarter ended September 30, 2002,
           regarding services to be provided by Alfred V. Greco PLLC      filed May 21, 2003

10.16      Consulting Agreement, dated August 15, 2002,                   Exhibit 10.3 to Amendment No. 1 to
           between SLS International, Inc. and Atlantic Services Ltd.     Form 10-QSB for quarter ended September 30, 2002,
                                                                          filed May 21, 2003
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER                     EXHIBIT                                                      WHERE LOCATED
------     -----------------------------------------------------------    ------------------------------------------------
<S>        <C>                                                            <C>
10.17      Consulting Agreement, dated September 10, 2002,                Exhibit 10.4 to Amendment No. 1 to Form 10-QSB
           between SLS International, Inc. and Art Malone Jr.             for quarter ended September 30, 2002, filed May
                                                                          21, 2003

10.18      Settlement Agreement and General Release dated                 Exhibit 10.20 to Form 10-KSB for year ended
           April 1, 2003 between McQuerterGroup and SLS                   December 31, 2002, filed May 21, 2003
           International, Inc.

10.19      Letter Agreement dated October 25, 2002 between                Exhibit 10.21 to Form 10-KSB for year ended
           SLS International, Inc. and Patrick J. Armstrong               December 31, 2002, filed May 21, 2003

10.20      Letter Agreement dated October 25, 2002 between                Exhibit 10.22 to Form 10-KSB for year ended
           SLS International, Inc. and Larry R. Stessel                   December 31, 2002, filed May 21, 2003

10.21      Consulting Agreement, dated November 18, 2002                  Exhibit 10.23 to Form 10-KSB for year ended
           between SLS International, Inc. and Atlantic Services Ltd.     December 31, 2002, filed May 21, 2003

10.22      Investor Relations and Financial Public Relations              Exhibit 10.24 to Form 10-KSB for year ended
           Consulting Agreement, dated December 15, 2002                  December 31, 2002, filed May 21, 2003
           between SLS International, Inc. and Worldwide
           Financial Marketing, Inc.

10.23      Consulting Agreement dated February 20, 2003,                  Exhibit 10.1 to Form 10-QSB for quarter ended
           between SLS International, Inc. and Tom Puccio                 March 31, 2003, filed June 16, 2003

10.24      Option Agreement, dated as of May 19, 2003,                    Exhibit 10.1 to Form 10-QSB for quarter ended
           between the Company and Steerpike (Overseas) Ltd.              June 30, 2003, filed August 14, 2003

10.25      Letter Agreement, dated as of May 19, 2003, between the        Exhibit 10.2 to Form 10-QSB for quarter ended
           Company and Steerpike (Overseas) Ltd.                          June 30, 2003, filed August 14, 2003

10.26      Letter Agreement, dated as of May 19, 2003, between the        Exhibit 10.3 to Form 10-QSB for quarter ended
           Company and Steerpike Inc.                                     June 30, 2003, filed August 14, 2003

10.27      Letter Agreement, dated as of July 10, 2003, between the Exhibit 10.4
           to Form 10-QSB for quarter ended Company and Alfred V. Greco PLLC,
           amending prior letter June 30, 2003, filed August 14, 2003 agreement,
           dated July 17, 2002, concerning the settlement of certain litigation
           between such parties
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER                     EXHIBIT                                                      WHERE LOCATED
------     -----------------------------------------------------------    ------------------------------------------------
<S>        <C>                                                            <C>
10.28      Consulting Agreement, dated as of July 14, 2003, between       Exhibit 10.2 to Form 10-QSB for quarter ended
           SLS International, Inc. and Atlantic Services Ltda.            September 30, 2003, filed November 11, 2003

10.29      Consulting Agreement, dated as of July 22, 2003, between       Exhibit 10.3 to Form 10-QSB for quarter ended
           SLS Loudspeakers and Atlantic Services Ltda.                   September 30, 2003, filed November 11, 2003

10.30      Consulting Agreement, dated as of August 11, 2003, between     Exhibit 10.4 to Form 10-QSB for quarter ended
           SLS International, Inc. and G. Ghecko Enterprises              September 30, 2003, filed November 11, 2003

10.31      Contract for Promotional Services, dated July 14, 2003,        Exhibit 10.5 to Form 10-QSB for quarter ended
           between Ronald E. Gee and SLS International, Inc.              September 30, 2003, filed November 11, 2003

10.32      Contract for Promotional Services, dated August 5, 2003,       Exhibit 10.6 to Form 10-QSB for quarter ended
           between Ronald E. Gee and SLS International, Inc.              September 30, 2003, filed November 11, 2003

10.33      Contract for Promotional Services, dated September 5, 2003,    Exhibit 10.7 to Form 10-QSB for quarter ended
           between Ronald E. Gee and SLS International, Inc.              September 30, 2003, filed November 11, 2003

10.34      Consulting Agreement, dated as of August 11, 2003, between Exhibit
           10.8 to Form 10-QSB for quarter ended SLS Loudspeakers and Berkshire
           International, LLC September 30, 2003, filed November 11, 2003

10.35      Letter Agreement, dated August 29, 2003, between SLS           Exhibit 10.9 to Form 10-QSB for quarter ended
           International and Art Malone, Jr.                              September 30, 2003, filed November 11, 2003

10.36      Consulting Agreement, dated August 21, 2003, between SLS       Exhibit 10.10 to Form 10-QSB for quarter ended
           International, Inc. and Grant Galloway                         September 30, 2003, filed November 11, 2003

10.37      Agreement, dated July 31, 2003 between SLS International,      Exhibit 10.11 to Form 10-QSB for quarter ended
           Inc. and Wall Street Investor Relations Corp.                  September 30, 2003, filed November 11, 2003

10.38      30 Days Public Relations Services Contracts, dated July 23, Exhibit
           10.12 to Form 10-QSB for quarter ended 2003, between Fitzgerald
           Galloway Consulting and SLS September 30, 2003, filed November 11,
           2003 International, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER                     EXHIBIT                                                      WHERE LOCATED
------     -----------------------------------------------------------    ------------------------------------------------
<S>        <C>                                                            <C>
10.39      Merger Agreement, dated March 12, 2004, among SLS              Exhibit 10.1 to Form 8-K filed March 17, 2004
           International, Inc., Evenstar, Inc., Joel A. Butler, David
           L. Butler, Patrick D. Butler, and Evenstar Mergersub, Inc.

10.40      Employment Agreement, dated March 12, 2004, between SLS        Exhibit 10.2 to Form 8-K filed March 17, 2004
           International, Inc. and Joel A. Butler

10.41      Consulting Services Agreement, dated October 28, 2003,         Filed herewith
           between SLS International, Inc. and Zane Sellis

10.42      Consulting Services Agreement, dated November 6, 2003,         Filed herewith
           between SLS International, Inc. and George Iordanou

10.43      Consulting Services Agreement, dated November 10, 2003,        Filed herewith
           between SLS International, Inc. and William F. Fischbach

10.44      Consulting Services Agreement, dated November 20, 2003,        Filed herewith
           between SLS International, Inc. and Edward Decker

10.45      Consulting Services Agreement, dated November 20, 2003,        Filed herewith
           between SLS International, Inc. and Christopher Obssuth

10.46      Stipulation for Entry of Judgment and Mutual General Release   Filed herewith

21         List of Subsidiaries of SLS International, Inc.                Filed herewith

23         Consent of Weaver & Martin LLC Independent                     Filed herewith.
           Certified Public Accountants

31         Certification of Periodic Report by Chief Executive Officer    Filed herewith
           and Chief Financial Officer under Section 302 of the
           Sarbanes-Oxley Act of 2002

32         Certification of Periodic Report by Chief Executive Officer    Filed herewith
           and Chief Financial Officer under Section 906 of the
           Sarbanes-Oxley Act of 2002
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER                     EXHIBIT                                                      WHERE LOCATED
------     -----------------------------------------------------------    ------------------------------------------------
<S>        <C>                                                            <C>

99.1       Consent Order of Missouri Securities Division and              Exhibit 99(iv) to Post-Effective Amendment No. 1
           SLS International, Inc.                                        filed May 30, 2001

99.2       Promotional Shares Lock-In Agreement                           Exhibit 99(v) to Post-Effective Amendment No. 1
                                                                          filed May 30, 2001

99.3       Modification to Consent Order of Missouri Securities           Exhibit 99.1 to Post-Effective Amendment No. 2
           Division and SLS International, Inc.                           filed February 9, 2004
</TABLE>