SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]   Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
      Exchange Act of 1934

      For the Quarterly Period Ended September 30, 2005 or

[ ]   Transition Report Pursuant to Section 13 or 15(d) of The Securities
      Exchange Act of 1934

             For the Transition Period from _________ to __________

                        Commission File Number: 333-43770

                             SLS INTERNATIONAL, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

                Delaware                                  52-2258371
----------------------------------------      ---------------------------------
       (State of Incorporation)               (IRS Employer Identification No.)

             1650 W. Jackson
             Ozark, Missouri                                65721
----------------------------------------      ---------------------------------
(Address of Principal Executive Offices)                  (Zip Code)

         Issuer's Telephone Number, Including Area Code: (417) 883-4549

              ----------------------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

      Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ]  No [X]

          APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                         DURING THE PRECEDING FIVE YEARS

      Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
subsequent to the distribution of securities under a plan confirmed by a court.
N/A Yes [ ]  No [X]

On November 07, 2005, 46,283,310 shares of our common stock were outstanding.

<PAGE>

                             SLS INTERNATIONAL, INC.

                                      INDEX

                                                                        PAGE NO.
                                                                        --------

                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheet                               3
         Condensed Consolidated Statements of Operations                    4
         Condensed Consolidated Statement of Cash Flows                     6
         Notes to Condensed Consolidated Financial Statements               7

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                               15

Item 3.  Quantitative and Qualitative Disclosures About Market Risk        22

Item 4.  Controls and Procedures                                           22

                           PART II. OTHER INFORMATION

Item 6.  Exhibits                                                          23

Signatures                                                                 24

                                        2

<PAGE>

SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                September 30,       December 31,
                                                                                     2005               2004
                                                                                --------------     --------------
                                                                                 (unaudited)         (audited)
<S>                                                                             <C>                <C>
Assets
Current assets:
   Cash                                                                         $      301,705     $   10,712,858
   Certificates of Deposits                                                          2,000,000                  -
   Accounts receivable, less allowance for doubtful accounts of
     $45,000 for September 30, 2005 and December 31, 2004                              365,633            271,429
   Inventory                                                                         4,674,498          1,908,588
   Deposits - inventory                                                                 58,000             50,000
   Deposits - Merger                                                                         -            100,000
   Prepaid expenses and other current assets                                           573,188            192,817
                                                                                --------------     --------------
         Total current assets                                                        7,973,024         13,235,692
                                                                                --------------     --------------

Fixed assets:
   Construction in Progress
   Building                                                                          4,161,230                  -
   Vehicles                                                                            283,233             51,949
   Equipment                                                                           620,165            234,805
   Leasehold improvements                                                                4,370            245,681
                                                                                --------------     --------------
                                                                                     5,068,998            532,435
Less accumulated depreciation                                                          219,111            105,131
                                                                                --------------     --------------
         Net fixed assets                                                            4,849,887            427,304
                                                                                --------------     --------------
      Prepaid Expense                                                                   87,914                  -
                                                                                --------------     --------------
Total assets                                                                    $   12,910,825     $   13,662,996
                                                                                ==============     ==============

Liabilities and Shareholders' Equity
Current liabilities:
   Current maturities of long-term debt and notes payable                       $          760     $       29,101
   Accounts payable                                                                    704,665            346,980
   Customer Deposits                                                                    76,377                  -
   Accrued liabilities                                                                     866            630,503
                                                                                --------------     --------------
         Total current liabilities                                                     782,668          1,006,584
                                                                                --------------     --------------

   Notes payable, less current maturities                                                7,293             10,951
   Accrued Liabilities Class D Warrants                                                 12,804                  -
                                                                                --------------     --------------
         Total Long term liabilities                                                    20,097             10,951
                                                                                --------------     --------------
         Total liabilities                                                             802,765          1,017,535

Commitments and contingencies:
Temporary Equity:
   Preferred Stock, Series A, $.001 par, 2,000,000 shares authorized;
      76,000 and 346,873 shares issued as of September 30, 2005 and
      December 31, 2004.                                                                    76                347
   Contributed Capital - preferred                                                     396,225          1,707,367
   Common Stock, $.001 par; 75,000,000 shares authorized; 2,568,400
      shares and 2,568,400 shares issued as of September 30, 2005 and
      December 31, 2004                                                                  2,568              2,568
   Contributed Capital - common                                                      1,338,132          1,338,132
Shareholders' equity:
   Preferred stock, Series B, $.001 par, 1,000,000 shares authorized;
      97,200 shares issued as of September 30, 2005 and 196,050 shares
      issued as of December 31, 2004                                                        97                196
   Preferred stock, Series C, $.001 par 25,000 shares authorized; 14,450
      and no shares issued as of September 30, 2005 and December 31, 2004                   14                  -
   Deposits on Preferred stock, series C                                                     -          8,849,420
   Contributed capital - preferred                                                  16,981,107          5,069,298
   Common stock, $.001 par; 75,000,000 shares authorized; 43,539,910
      shares and 39,184,000 shares issued at September 30, 2005 and
      December 31, 2004                                                                 43,540             39,184
   Common stock not issued but owed to buyers; 1,428,071 shares and
      183,000 shares at September 30, 2005 and December 31, 2004                         1,428                300
   Contributed capital - common                                                     29,857,500         20,543,959
   Unamortized cost of stock issued for services                                    (1,482,266)        (1,363,973)
   Unamortized cost of stock issued for compensation                                (2,217,971)                 -
   Retained deficit                                                                (32,812,390)       (23,541,337)
                                                                                --------------     --------------

         Total shareholders' equity                                                 12,108,060         12,645,461
                                                                                --------------     --------------

                                                                                $   12,910,825     $   13,662,996
                                                                                ==============     ==============
</TABLE>

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

                                        3

<PAGE>

SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                                                      For The Nine Months
                                                      Ended September 30,
                                                -------------------------------
                                                     2005             2004
                                                -------------    --------------
                                                           (unaudited)

Revenue                                         $   2,889,149    $    1,502,559

Cost of sales                                       1,966,665           814,230
                                                -------------    --------------

Gross profit                                          922,484           688,328

General and administrative expenses                 8,333,227         7,438,310
                                                -------------    --------------

Loss from operations                               (7,410,743)       (6,749,980)

Other income (expense):
      Interest expense                                   (445)           (1,469)
      Interest and miscellaneous, net                 136,232            28,198
      Gain (loss) on disposal of fixed assets        (234,158)                -
      Gain (loss) on valuation of D warrants        1,493,308                 -
                                                -------------    --------------

                                                    1,394,937            26,729
                                                -------------    --------------
Loss before income tax                             (6,015,806)       (6,723,252)

Income tax provision                                        -                 -
                                                -------------    --------------
Net loss                                           (6,015,806)       (6,723,252)
                                                -------------    --------------
Deemed dividend associated with
   beneficial conversion of preferred stock        (3,253,790)       (3,874,061)
   Premium - preferred series C                        (7,678)                -
                                                -------------    --------------
Net loss availiable to common shareholders      $  (9,277,274)   $  (10,597,313)
                                                =============    ==============

Basic and diluted earnings per share            $       (0.21)   $        (0.34)
                                                =============    ==============

Weighted average shares outstanding                44,526,987        30,995,380
                                                =============    ==============

The accompanying notes are an integral part of these condensed consolidated
financial statements

                                        4

<PAGE>

SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                                                       For The Three Months
                                                       Ended September 30,
                                                   ----------------------------
                                                       2005            2004
                                                   ------------    ------------
                                                           (unaudited)

Revenue                                            $  1,209,076    $    576,336

Cost of sales                                           847,787         333,048
                                                   ------------    ------------

Gross profit                                            361,289         243,288

General and administrative expenses                   3,313,312       1,569,381
                                                   ------------    ------------

Loss from operations                                 (2,952,023)     (1,326,093)

Other income (expense):
      Interest expense                                       (8)           (451)
      Interest and miscellaneous, net                    69,893           8,495
      Gain (loss) on valuation of D warrants            224,858               -
                                                   ------------    ------------

                                                        294,744           8,044
                                                   ------------    ------------

Loss before income tax                               (2,657,280)     (1,318,048)

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

Net loss                                             (2,657,280)     (1,318,048)
                                                   ------------    ------------

Deemed dividend associated with
   beneficial conversion of preferred stock                   -      (1,164,676)
Premium - preferred series C                                  -               -
                                                   ------------    ------------

Net loss availiable to common shareholders         $ (2,657,280)   $ (1,318,048)
                                                   ============    ============

Basic and diluted earnings per share               $      (0.06)   $      (0.04)
                                                   ============    ============

Weighted average shares outstanding                  46,839,714      34,851,513
                                                   ============    ============

The accompanying notes are an integral part of these condensed consolidated
financial statements

                                        5

<PAGE>

SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              For The Nine Months
                                                                              Ended September 30,
                                                                         ------------------------------
                                                                             2005             2004
                                                                         -------------    -------------
                                                                                  (unaudited)
<S>                                                                      <C>              <C>
Operating activities:
   Net loss                                                              $  (6,015,806)   $  (6,723,252)
   Adjustments to reconcile net income to cash flows
      from operating activities:
         Depreciation and amortization                                         125,502           38,400
         Amortization of cost of stock issued for services                     398,012          210,012
         Expense of stock options granted for services                         747,190        2,719,977
         Compensation expense for stock sold to employees                      475,000                -
         Loss (gain) on disposal of fixed assets                               234,158           (3,000)
         Gain on valuation of D warrants                                    (1,493,308)               -
         Goodwill impairment charge                                                  -        1,148,502
   Change in assets and liabilities-
         Accounts receivable, less allowance for doubtful accounts             (94,204)         (87,287)
         Inventory                                                          (2,765,910)      (1,116,130)
         Deposits - Inventory                                                   (8,000)        (321,016)
         Deposits - merger                                                     100,000                -
         Prepaid expenses and other current assets                            (468,285)        (108,333)
         Accounts payable                                                      357,685          101,766
         Customer deposits                                                      76,377                -
         Accrued liabilities                                                  (616,833)           1,845
                                                                         -------------    -------------
         Cash used in operating activities                                  (8,948,422)      (4,138,517)
                                                                         -------------    -------------

Investing activities:
   Investment in certificates of deposits                                   (2,000,000)               -
   Proceeds from disposal of fixed assets                                            -            3,000
   Additions of fixed assets                                                (4,777,874)        (158,294)
                                                                         -------------    -------------
         Cash used in investing activities                                  (6,777,874)        (155,294)
                                                                         -------------    -------------

Financing activities:
   Sale of stock, net of expenses                                            4,515,988        5,291,950
   Acquisition of subsidiary                                                         -         (400,000)
   Repayments of notes payable                                                 (31,998)          (1,326)
                                                                         -------------    -------------
         Cash provided by financing activities                               4,483,990        4,890,624
                                                                         -------------    -------------
Increase in cash                                                           (10,411,153)         596,812
Cash, beginning of period                                                   10,712,858        1,482,786
                                                                         -------------    -------------
Cash, end of period                                                      $     301,705    $   2,079,598
                                                                         =============    =============

Supplemental cash flow information:
   Interest paid                                                         $       8,388    $           -
   Income taxes paid (refunded)                                                      -                -
   Change in temporary equity                                                1,311,413        5,713,592

Noncash investing activities:
   Stock issued and options granted for services                         $     747,190    $   2,719,977
</TABLE>

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

                                        6

<PAGE>

                             SLS INTERNATIONAL, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

      The accompanying unaudited condensed consolidated financial statements at
      September 30, 2005 have been prepared in accordance with U.S. generally
      accepted accounting principles for interim financial information and with
      the instructions to Form 10-Q and reflect all adjustments which, in the
      opinion of management, are necessary for a fair presentation of financial
      position as of September 30, 2005 and results of operations and cash flows
      for the nine months ended September 30, 2005. All such adjustments are of
      a normal recurring nature. The results of operations for the interim
      period are not necessarily indicative of the results expected for a full
      year. Certain amounts in the 2004 financial statements have been
      reclassified to conform to the 2005 presentations. The statements should
      be read in conjunction with the financial statements and footnotes thereto
      included in our Form 10-KSB for the year ended December 31, 2004.

NOTE 2 - NOTES PAYABLE

      At December 31, 2004 there is a note payable to an individual in the
      amount of $25,000. This note was paid in the quarter ended June 30, 2005.
      There is also a note payable for equipment in the amount of $15,052 and
      $8,058 as of December 31, 2004 and September 30, 2005, respectively. This
      note bears interest of 5.16% and matures in September of 2008. Interest
      expense for the year ended December 31, 2004 and the nine months ended
      September 30, 2005 was $1,907 and $438 respectively.

NOTE 3 - STOCK TRANSACTIONS

      In July 2003, we entered into an endorsement agreement with the recording
      artist Sting through Steerpike Ltd. The agreement grants 1,100,000 options
      in exchange for endorsements of our 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 was recorded over the two-year period of the agreement beginning
      July 31, 2003 and ended June 30, 2005. Expense was 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. Factors used in the Black-Scholes pricing model
      included: risk-free interest rates of 3.65% to 3.73%; strike price of
      $0.25; market prices of $2.04 to $2.26; volatility rate of 22.13%; and a
      yield rate of 0.00%. Consulting expense relating to this agreement was
      $110,600 for the nine months ended September 30, 2005. As of September 30,
      2005 all of the 1,100,000 options have been earned and expensed. There
      will be no further expense incurred in 2005.

      In November 2003, an agreement was signed with William Fischbach for
      consulting services to be performed November 10, 2003 to November 2006. As
      compensation for consulting services we issued 400,000 shares of common
      stock on November 11, 2003. Using the market value on 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
      $195,000 for the nine months ended September 30, 2005. On September 30,
      2005 there was $288,671 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

                                        7

<PAGE>

      January 1 of each year based on the previous year's performance levels. No
      options were issued on January 1, 2004 or 2005 under this agreement. As of
      September 30, 2005, Mr. Fischbach had earned no options based on his
      performance in the nine months ended September 30, 2005. 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 September 30, 2005, Mr. Fischbach had earned no cash fee
      in the nine months ended September 30, 2005.

      In March 2004, we issued an option to purchase 100,000 shares of our
      common stock at $2.98 per share as part of an employment agreement signed
      with Joel Butler for consulting services. Using the market value on the
      date the agreement was signed, the shares were valued at $118,000 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 two-year period of the agreement. Consulting expense relating to this
      agreement was $88,500 for the nine months ended September 30, 2005. On
      September 30, 2005 there was $29,500 remaining in unamortized stock issued
      for services for this agreement.

      In December 2004, an agreement was signed with W. Curtis Hargis Co.
      (Hargis) for consulting services. As compensation for consulting services
      we agreed to issue 100,000 options upon reaching an agreement with a
      retailer introduced to us by Hargis. This occurred on March 21, 2005. We
      also agreed to issue Hargis an option to purchase one share of common
      stock for every $100 in sales from the retailer provided that Hargis shall
      not be entitled to receive in excess of 500,000 options. The options have
      a term of three years and have a strike price equal to the average price
      of the Company's common stock for the five trading days immediately prior
      to the day the options are earned. Through September 30, 2005, Hargis had
      earned 101,529 options to purchase common stock. Using the Black-Scholes
      pricing method, the options were valued at $62,886 and recorded as
      consulting expense in the nine months ended September 30, 2005. Factors
      used in the Black-Scholes pricing model included: risk-free interest rate
      of 3.93%; strike price of $2.11; market price of $2.30; volatility rate of
      25.87%; and a yield rate of 0.00%. The agreement also calls for additional
      compensation to Hargis in the form of a cash fee of 2% based on payment
      received from the retailer. Through September 30, 2005, Hargis had earned
      $1,608 based on the value provided to us in the nine months ended
      September 30, 2005.

      In February of 2005, an agreement was signed with 3CD Consulting, LLC for
      consulting services to be performed November 18, 2004 to November 17,
      2007. As compensation for consulting services the Company issued 1,000,000
      options for shares of common stock. The options have a term of 3 years and
      a strike price of $2. Using the Black-Scholes pricing model, the options
      were valued at $814,781 and recorded as a debit in the equity section of
      the balance sheet as unamortized cost of stock issued for services.
      Factors used in the Black-Scholes pricing model included: risk-free
      interest rate of 3.08%; strike price of $2.00; market price of $2.45;
      volatility rate of 29.73%; and a yield rate of 0.00%. The expense is
      amortized

                                        8

<PAGE>

      over the three-year period of the agreement. Consulting expense relating
      to this agreement was $203,694 for the nine months ended September 30,
      2005. On September 30, 2005, there was $579,091 remaining in unamortized
      cost of stock issued for services for this agreement.

      In January of 2005, an agreement was signed with New AV Ventures, LLC (AV)
      for consulting services to be performed January 31, 2005 to January 31,
      2010. As compensation for consulting services the Company issued 300,000
      shares of common stock. Using the market value on the date the agreement
      was signed, the shares were valued at $720,000 and recorded as a debit in
      the equity section of the balance sheet as unamortized cost of stock
      issued for services. The cost will be amortized over the five-year period
      of the agreement. Consulting expense relating to this agreement was
      $108,000 for the nine months ended September 30, 2005. On September 30,
      2005 there was $612,000 remaining in unamortized stock issued for services
      for this agreement. The Company also agreed to give AV a percentage of
      future sales to certain vendors and one option to purchase one share of
      common stock for each $100 of sales to vendors generated by AV provided
      that AV shall not be entitled to receive in excess of 700,000 options. The
      options will have a term of five years and have a strike price equal to
      the average price of the Company's common stock for the five trading days
      immediately prior to January 1 of the following year. Through September
      30, 2005, New AV Ventures, LLC has earned no cash fee or options under
      this agreement.

      In January of 2005, the Company completed a private placement of 15,000
      shares of its Series C Preferred Stock for an aggregate purchase price of
      $15,000,000. The proceeds were $13,340,408, net of expenses. Expenses
      associated with the offering are legal costs of $132,558 and expenses
      related to a finder's fee. The finder was compensated with $900,000 plus
      600,000 warrants, which were valued at $627,034 using the Black-Scholes
      pricing model. Factors used in the Black-Scholes pricing model included:
      risk-free interest rate of 3.64%; strike price of $2.50; market price of
      $2.79; volatility rate of 29.73%; and a yield rate of 0.00%.

      The Series C Preferred Stock contains a beneficial conversion feature. The
      feature allows the holder to convert each share of preferred to 400 shares
      of common stock and accrues a 6% premium to the stated face value of the
      shares of preferred stock, which would be convertible into additional
      shares of common stock. A discount on preferred shares of $3,246,112
      relating to the beneficial conversion feature was recorded. As of
      September 30, 2005, the full discount had been amortized to retained
      earnings.

      The 6% premium accrues to the face value of the preferred stock and
      compounds quarterly. As of September 30, 2005, the face value of the
      14,450 outstanding shares is $15,098,371, of which $648,371 is premium.
      The face value of the preferred stock is convertible into common stock at
      $2.50 per share. As a result, on September 30, 2005, the 14,450
      outstanding shares of preferred stock were convertible into 6,039,348
      shares of common stock.

                                        9

<PAGE>

      Attached to each Series C Preferred share are 400 Class D warrants. Each
      Class D warrant has a term of five years and provides the right to
      purchase one share of our common stock at $6.00 per share, subject to
      certain adjustments. The Company may redeem the warrants and may require
      the holders to convert the preferred stock to common stock if certain
      conditions are met. Using the Black-Scholes model for pricing, the Class D
      warrants were valued at $1,506,112. Factors used in the Black-Scholes
      pricing model included: risk-free interest rate of 3.64%; strike price of
      $6.00; market price of $2.79; volatility rate of 29.73%; and a yield rate
      of 0.00%.

      The provisions of the agreement pertaining to the Class D warrants provide
      for penalties if we fail to keep the registration statement effective for
      the resale of the common stock issuable upon exercise of the warrants.
      Since these provisions provide a settlement alternative that would be
      avoided by the company under other settlement alternatives, we are
      required by EITF 00-19 to record a liability in an amount equal to the
      market value of the Class D warrants. The initial amount of this liability
      is the fair market value as determined by the Black-Scholes pricing model
      amounting to $1,506,112. Subsequent changes in the Black-Scholes based
      market value are to be reported in our statement of operations. As of
      September 30, 2005, using the Black-Scholes pricing model produced a value
      of $12,804. Factors used in the Black-Scholes pricing model included:
      risk-free interest rate of 3.64% - 4.18%; strike price of $6.00; market
      price of $$1.91 - $2.79; volatility rate of 18.54% - 29.73%%; and a yield
      rate of 0.00%. Consequently the decrease in the original liability of
      $1,506,112 to the September 30, 2005 value of $12,804 resulted in
      recognition of a gain amounting to $1,493,308.

      In the nine months ended September 30, 2005, 274,873 shares of preferred
      stock, series A, were converted to 2,748,730 shares of common stock. There
      are 76,000 shares of series A preferred stock outstanding as of September
      30, 2005.

      In the nine months ended September 30, 2005, 98,850 shares of preferred
      stock, series B, were converted to 988,500 shares of common stock. There
      are 97,200 shares of series B preferred stock outstanding as of September
      30, 2005.

      In the nine months ended September 30, 2005, 550 shares of preferred
      stock, series C, were converted into 220,000 shares of common stock. There
      are 14,450 shares of series C preferred stock outstanding as of September
      30, 2005. The premium on these converted shares was $7,678 and is recorded
      in these financial statements as a stock dividend. The premium converted
      at $2.50 per share into an additional 3,071 shares of common stock. These
      shares were not issued as of September 30, 2005 and are therefore shown in
      these financial statements as stock not issued but owed.

      In the nine months ended September 30, 2005, 90,000 options were granted
      from time to time to Ryan Schinmann for consulting services. The options
      have strike prices equal to the market price on their respective grant
      dates, ranging from $2.04 to $2.51. Using the Black-Scholes pricing model,
      the options were valued at $86,269 and recorded as consulting expense.
      Factors used in the Black-

                                       10

<PAGE>

      Scholes pricing model included: risk-free interest rates of 3.94% to
      4.50%; strike prices of $2.04 to $2.51; market prices of $2.04 to $2.51;
      volatility rate of 25.87%; and a yield rate of 0.00%. 10,000 additional
      options are to be granted every month until the contract is terminated,
      and the contract is terminable by the Company at will.

      In the nine months ended September 30, 2005, 930,000 options were granted
      to directors of the Company. Using the Black-Scholes pricing model, the
      options were valued at $686,868 and recorded as compensation expense.
      Factors used in the Black-Scholes pricing model included: risk-free
      interest rates of 3.71% to 4.06%; strike prices of $2.27 to $2.50; market
      prices of $2.27 to $2.38; volatility rate of 22.13%; and a yield rate of
      0.00%. In the second quarter of 2005, 730,000 options issued in the first
      quarter automatically expired upon resignation of two directors.
      Therefore, compensation expense for the nine months ended September 30,
      2005 was reduced by $490,868 in credits from the expiration of such
      options, resulting in a net expense of $196,000 for the nine months ended
      September 30, 2005.

      In June of 2005, an agreement was signed with JMBP, Inc. and Mark Burnett
      for consulting services. As compensation for consulting services the
      Company agreed to issue 1,000,000 options for shares of common stock and
      1,000,000 warrants for shares of common stock. The options have a term of
      five years and a strike price of $2.05. The warrants have a term of five
      years and a strike price of $6.50. 400,000 options and 400,000 warrants
      vested on the date the agreement was signed. The remaining options and
      warrants vest upon various events as set forth in the agreement. Through
      September 30, 2005, 100,000 additional warrants and 100,000 additional
      options vested. Using the Black-Scholes pricing model, these options and
      warrants were valued at $283,740 and recorded as consulting expense for
      the nine months ended September 30, 2005. Factors used in the
      Black-Scholes pricing model included: risk-free interest rate of 3.61% -
      3.89%; strike price of $2.05 - $2.51 for the options and $6.50 for the
      warrants; market price of $1.91 - $2.05; volatility rate of 19.36% -
      22.13%; and a yield rate of 0.00%. Expenses to be recorded in future
      quarters are unknown at this time because the value of the vesting options
      and warrants will be partly based on the market price on the date the
      vesting events take place.

      In June of 2005, we entered into employment agreements with Michael
      Maples, Steven Lamar, and John Gott. Each agreement has a term of three
      years. In the agreements we agreed to pay an aggregate of $150,000 in
      signing bonuses, agreed to issue an aggregate of 1,125,000 shares of
      common stock, and agreed to issue an aggregate of 1,250,000 options. The
      signing bonuses were paid and capitalized as a prepaid expense, which will
      be amortized monthly over the three-year term of each agreement. In the
      nine months ended September 30, 2005, $14,132 was recorded in compensation
      expense. There is $135,868 remaining in prepaid expense as of September
      30, 2005. The 1,125,000 shares of common stock are required to be issued
      in January 2006 and are therefore shown in these financial statements as
      "stock not issued but owed". The shares were valued at $2,418,750, using
      the market price on the date the agreement was signed, and recorded as
      unamortized cost of stock issued for

                                       11

<PAGE>

      compensation in the equity section of these financial statements. The cost
      will be amortized over the three-year term of the agreements. For the nine
      months ended September 30, 2005, $230,279 was amortized into compensation
      expense. Unamortized cost of stock issued for compensation was $2,188,471
      as of September 30, 2005. The 1,250,000 options will be earned evenly over
      the three-year term of each agreement. Each option is convertible into one
      share of common stock at a strike price of $2.50 and is exercisable for a
      period of ten years. Expense associated with the options will be recorded
      over the three-year period of the agreement at fair market value, using
      the Black-Scholes pricing model. Compensation expense relating to options
      earned for the nine months ended September 30, 2005 was $116,038. Factors
      used in the Black-Scholes pricing model included; risk-free interest rates
      of 3.75% - 4.09%; strike price of $2.50; market prices of $1.91 - $2.15;
      volatility rates of 22.13% - 26.73%; and a yield rate of 0.00%. Through
      September 30, 2005, 49,562 of the 1,250,000 options have been earned and
      expensed. Expenses to be recorded in future quarters are unknown at this
      time because the value of the earned options will be partly based on the
      month-end market price.

      In June of 2005, an officer of the Company sold common stock, owned
      personally by him, to employees. 275,000 shares of common stock were sold
      at a price of $0.05 per share. The difference between the estimated fair
      market values of the shares (estimated by taking a discount from the
      closing market price on the day of the sales, with the discount reflecting
      restrictions on transfer affecting the shares pursuant to SEC rule 144)
      and the employee purchase price has been recorded as compensation expense.
      Compensation expense relating to this transaction was $475,000 in the nine
      months ended September 30, 2005.

NOTE 4 - UNAMORTIZED COST OF STOCK ISSUED FOR SERVICES AND COMPENSATION

      As detailed in Note 3, we have issued or agreed to issue shares of common
      stock and options as part of various consulting agreements. The costs of
      these issuances are 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 nine months ended September 30, 2005,
      $1,145,202 was amortized into consulting expense. Unamortized cost of
      stock issued for services was $1,482,266 as of September 30, 2005.

      As detailed in Note 3, we have agreed to issue common stock as part of
      various employment agreements. The costs of these issuances are recorded
      as a debit in the equity section of the balance sheet as unamortized cost
      of stock issued for compensation. The balance is amortized into
      compensation expense over the three-year lives of the employment
      agreements. For the nine months ended September 30, 2005, $230,279 was
      amortized into compensation expense. Unamortized cost of stock issued for
      compensation was $2,217,971 as of September 30, 2005.

                                       12

<PAGE>

NOTE 5 - CONSULTING, PROMOTIONAL AND INVESTOR RELATIONS SERVICES

      Consulting and investor relation services expense was $2,199,234 for the
      nine months ended September 30, 2005. Consulting and investor relation
      expenses incurred are detailed below:

      Consulting expenses relating to stock issued for services were $398,012
      (See Note 4) in the nine months ended September 30, 2005. Consulting
      expenses relating to options issued for services was $747,190 (See Note 3)
      for the nine months ended September 30, 2005.

      Various individuals and corporations performed consulting services and
      investor relation services for us during the nine months ended September
      30, 2005 and were paid $1,054,032 in cash.

NOTE 6 - BUILDING AND RELATED PARTY TRANSACTIONS

      We paid rent of $18,750 for January of 2005 to a company 50% owned by John
      Gott, our Chief Executive Officer.

      In February of 2005, we exercised an option to purchase a building from a
      company 50% owned by John Gott, our Chief Executive Officer. The purchase
      price was $3,500,000.

NOTE 7 - TEMPORARY EQUITY - RESCISSION OFFERS

      The Company intends to make a rescission offer to all warrant holders who
      exercised warrants during the period from May 1, 2002 through May 10,
      2004. 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
      repurchase shares of common stock issued upon exercise of 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 well above the $.50 exercise price of the Class A warrants so no
      adjustment to the financial statements for the year ended December 31,
      2004 or the nine months ended September 30, 2005 has been made for the
      rescission offer. The current market price is below the $3.00 exercise
      price of the Class B warrants. Only 22,600 Class B warrants were issued in
      the period, making our potential rescission liability to the former Class
      B Warrant holders equal to $67,800 plus interest, which amount would be
      reduced to the extent of any sales of the underlying common stock by the
      former warrant holders. If all warrant holders accepted the rescission
      offer, the Company would be required to pay $1,340,700 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 on these financial statements.

      From 2001 to 2003, we sold shares of our Convertible Preferred Stock,
      which is reflected in these financial statements as our Series A Preferred
      Stock. The Company discovered that the

                                       13

<PAGE>

      certificate of designation for the Convertible Preferred Stock had not
      been filed, and the Company made such filing in December of 2004. The
      delay in filing the certificate of designation may have resulted in the
      shares of Convertible Preferred Stock not being validly issued. We intend
      to make a rescission offer during 2005 to the holders of all outstanding
      shares of Convertible Preferred Stock, but we do not intend to offer
      rescission to holders who have converted their Convertible Preferred Stock
      to common stock. If all holders of the 76,000 shares of Convertible
      Preferred Stock remaining outstanding on September 30, 2005 elected
      rescission at their original purchase price of $2.50 per share, the
      Company would be required to pay an aggregate of $190,000 plus interest.
      Because the current stock price is well above the conversion price, no
      adjustments to these financial statements have been recorded.

      Pending the completion of the rescission offer, the right of shareholders
      to seek rescission and receive the rescission amount is not completely
      within the control of the Company. As a result, the shares subject to
      rescission rights are considered and treated as temporary common and
      preferred stock for financial accounting purposes until such time as the
      rescission rights lapse or are exercised. Therefore the rescission amount
      and related shares were removed from the Shareholder Equity and are
      currently classified as Temporary Equity. The restatement was made solely
      to reflect this reclassification and did not affect the Company's
      previously reported net income, net income per share, assets or
      liabilities.

NOTE 8 - SUBSEQUENT EVENTS

      From October 1, 2005 through November 7, 2005, 10,000 shares of preferred
      stock, series A, were converted to 100,000 shares of common stock.

      From October 1, 2005 through November 7, 2005, 7,500 shares of preferred
      stock, series B, were converted to 75,000 shares of common stock.

                                       14

<PAGE>

ITEM 2. 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; a line of in-wall, in-ceiling
and outdoor loudspeakers; and a line for the cinema and movie theater market.

From the early 1990'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.

We began selling loudspeakers in June 2000 when we introduced our Professional
Line. We introduced our other lines of speakers in subsequent years, with the
most recent being the Cinema line, which we started selling in 2004. Our
products are primarily sold through a network of sales representatives and our
own internal sales force, for our following lines: Pro, Cinema, Home Theatre,
Studio, Universal Series, RLA and the PRD series. Recently we have consolidated
all our foreign distribution with one sales representative organization who will
work between the Company and all foreign distributors. We have also begun
selling products directly through a corporate sales department that targets
major "big box" retailers.

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

Quarter ended September 30, 2005 as compared to the quarter ended September 30,
-------------------------------------------------------------------------------
2004.
----

For the quarter ended September 30, 2005, revenue increased to $1,209,076 from
$576,336 in the 2004 period, a 110% increase, resulting primarily from the
positive results of a marketing program we started in January 2004 and our
increased production capabilities resulting from facility expansions completed
in 2004 and 2005. Compared to the same quarter of 2004, the most significant
sales increases have occurred in our "core" Pro products which accounted for 44%
of our sales in the quarter ended September 30, 2005. Sales to the Cinema
industry, a new line for 2005, have been very strong exceeding $280,000 for the
third quarter of 2005. During September of 2005 we shipped our new "home theater
in a box, the Q Line Silver to a Fortune 50 Retailer. While we believe this
channel exposure will be significant to our future sales growth, the initial
order was for 400 units to be distributed to 100 test stores throughout the US.
Our quarterly gross profit percentage decreased to approximately 30% in the 2005
period from margins of approximately 42% in the

                                       15

<PAGE>

2004 period, primarily due to unusually high profit margins in the 2004 period.

General and administrative expenses for the 2005 third quarter increased to
$3,313,312 from $1,569,381 in the 2004 third quarter, an increase of $1,743,931.
As shown in the table below, the increase resulted primarily from non-cash
charges for options and stock transactions of the new directors and executives
and continuing increased cash costs to support our new facility, new management
structure, and advertising programs. Advertising and promotion expense increased
in the 2005 period due to image and branding programs directed at the retail
market in connection with planned product launches in retail outlets in late
2005 and early 2006 (approximately $429,000 in the 2005 period) and demo and
promotional equipment costs ($237,000 in the 2005 period). Other cash G&A
expense include increases in labor and related costs (approximately $321,000),
trade show and travel ($101,000), and increased operating costs at our new
facility ($78,000).

                                                         THREE MONTHS ENDED
                                                   -----------------------------
                                                   September 30,   September 30,
                                                        2005            2004
                                                   -------------   -------------

NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued
   for consulting and investor relation services   $     246,661   $     373,412
Charges for options and stock issued and
   sold to directors/employees                           394,229              --
                                                   -------------   -------------

Total non-cash G&A expense                               640,890         373,412
                                                   -------------   -------------

CASH G&A EXPENSE ITEMS:
Consulting and investor relation services                866,549         574,481
Advertising and promotion                                796,625         120,268
Other cash G&A expenses                                1,009,248         501,220
                                                   -------------   -------------

Total cash G&A expense                                 2,672,422       1,195,969
                                                   -------------   -------------

Total G&A expense                                  $   3,313,312   $   1,569,381
                                                   =============   =============

Other income (expense) increased to a net income of $294,744 in the 2005 third
quarter as compared to net other income of $8,044 in the 2004 third quarter,
primarily due to $69,893 in interest earned on cash and certificates of deposit
related to cash received from our private placement of Series C Convertible
Preferred Stock and a $224,858 non-cash gain on the change in valuation of the
"D warrants" as explained further in Note 3 to the financial statements.

Due principally to the increase in general and administrative expense, offset to
a small degree by an increase in gross profit, and the other income items above,
our net loss increased to $2,657,280 in the third quarter of 2005 as compared to
a net loss of $1,318,048 in the comparable quarter of 2004.

Nine months ended September 30, 2005 as compared to the nine months ended
-------------------------------------------------------------------------
September 30, 2004.
-------------------

Revenue increased to $2,889,149 from $1,502,559 in the first nine months of
2005, a 92% increase, resulting primarily from the positive results of a new

                                       16

<PAGE>

marketing program we started in January 2004 and our increased production
capabilities resulting from facility expansions completed in 2004 and 2005. Most
significant sales increases have occurred in our "core" Pro and RLA products
which accounted for over 50% of our sales in the nine months ended September 30,
2004 and 2005. Sales to the Cinema industry, a new line for 2005, have been
strong, exceeding $500,000 for the first nine months of 2005. During September
of 2005 we shipped our new "home theater in a box, the Q Line Silver to a
Fortune 50 Retailer. Our gross profit percentage decreased to approximately 32%
in the 2005 period from approximately 46% in the 2004 period, primarily due to
unusually high profit margins in the 2004 period.

General and administrative expenses for the first nine months of 2005 increased
to $8,333,227 from $7,438,310 in the 2004 period. The increase resulted
primarily from increased advertising expenses as well as increases in costs to
support our new facility and new management structure. The costs for the nine
months of 2004 includes a one-time impairment charge of $1,148,502 recognized in
the first half of 2004 related to the Evenstar, Inc. acquisition.

                                                          NINE MONTHS ENDED
                                                   -----------------------------
                                                   September 30,   September 30
                                                       2005             2004
                                                   -------------   -------------

NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued for
   consulting and investor relation services       $   1,145,202   $   3,153,453
Charges for options and stock issued and
   sold to directors/employees                         1,105,817          87,786
Impairment charge - Evenstar, Inc.                            --         848,502
                                                   -------------   -------------

Total non-cash G&A expense                             2,251,019       4,089,741
                                                   -------------   -------------

CASH G&A EXPENSE ITEMS:
Consulting and investor relation services              1,053,871         912,476
Advertising and promotion                              1,466,379         226,396
Acquisitions - SA Sound                                       --         109,165
Acquisitions - BG deal expired                           100,000              --
Impairment charge - Evenstar, Inc.                            --         300,000
Other cash G&A expenses                                3,461,958       1,800,532
                                                   -------------   -------------

Total cash G&A expense                                 6,082,208       3,348,569
                                                   -------------   -------------

Total G&A expense                                  $   8,333,227   $   7,438,310
                                                   =============   =============

As shown in the preceding table, our non-cash G&A expenses have decreased
$1,838,722, net of additional charges for options and stock to directors and
employees. Cash G&A costs increased significantly due to a number of branding
and advertising programs, increased promotional costs, and consulting costs due
to infrastructure development and compliance issues. The increased advertising
costs included expenses for image and branding programs directed at the retail
market in connection with planned product launches in retail outlets in late
2005 and early 2006 (approximately $523,000 in the 2005 period), demo and
promotional equipment costs ($237,000 in the 2005 period), and preparation and
videos and collateral materials explaining our technology ($100,000 in the 2005
period). The increase in other cash G&A costs include increased labor and
related costs (approximately

                                       17

<PAGE>

$592,000), trade shows and travel ($397,000), and increased operating costs at
our new facility ($487,000).

The combined factors of increased revenue offset by the increase in general and
administrative costs resulted in a Loss from Operations for the nine months
ended September of 2005 amounting to $7,410,743 compared to $6,749,980 loss for
the same period of 2004.

Other income (expense) amounted to $1,394,937 of income for the nine months of
2005 compared to $26,729 other income for the same period during 2004. Major
components of the 2005 other income amount are a loss of $234,158 due to the
disposal of leasehold improvements made to our previous office and factory
facility, a gain of $136,232 from interest income resulting from the proceeds
for our Series C Preferred stock offering, and a non-cash gain of $1,493,308
from the change in valuation of our D warrants that were issued as part of the
Series C Preferred offering.

The increase in other income and gross profit more than offset the increase in
our general and administrative costs to result in a net loss for the nine months
of 2005 amounting to a $6,015,806 loss compared to a loss of $6,723,252 for the
same period of 2004.

FINANCIAL CONDITION

On September 30, 2005, our current assets exceeded current liabilities by
$7,190,356 compared to an excess of $12,229,108, on December 31, 2004. Total
assets exceeded total liabilities by $12,108,060, compared to an excess of total
assets over total liabilities of $12,645,461 on December 31, 2004. The changes
in working capital, total assets, and total liabilities were principally due to
the receipt of $13,340,408 in net proceeds from the closing of our January 2005
private placement ($8,849,420 of which had been received prior to December 31,
2004) and the purchase of our new headquarters and manufacturing facility for
$3,500,000. In the first nine months of 2005, we also invested $231,284 for new
vehicles, $661,230 for improvements to the new headquarters and manufacturing
facility, and $385,360 for new equipment.

Our operations used cash of $10,411,153 for the first nine months of 2005 which
was primarily attributable to the net loss of $6,015,806 recognized during the
period; an increase in inventory of $2,765,910; a reduction of accrued
liabilities by $616,833, as we paid a $600,000 liability accrued at December 31,
2004 for a finder's fee in connection with the January 2005 private placement;
and an increase in prepaid expenses and other current assets of $468,285
primarily related to prepaid advertising associated with our national branding
campaign, deposits and prepaid insurance. We wrote off the $100,000 paid to
Bohlender-Graebener Corporation upon expiration of our agreement. On September
30,2005, we had a backlog of orders of approximately $108,698 compared to a
backlog of $200,000 at this same time last year.

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.

On June 17, 2005, we entered into employment agreements with John M. Gott, our
Chairman and Chief Executive Officer; Steven M. Lamar, our newly hired
President; and Michael L. Maples, our newly hired Chief Operating Officer and
Chief Financial Officer. Each employment agreement has a term of three years

                                       18

<PAGE>

and severance payments equal to six months of base salary following a
termination by us without "cause" or a termination by the executive for "good
reason." Mr. Gott's agreement provides for an annual salary of $180,000, an
increase from his previous salary of $96,000; a grant of options to purchase up
to 500,000 shares of our common stock at $2.50 per share; and an agreement to
grant 500,000 shares of our common stock to Mr. Gott in January 2006.

Mr. Lamar's agreement provides for an annual salary of $120,000, a signing bonus
of $100,000, a grant of options to purchase up to 500,000 shares of our common
stock at $2.50 per share, and an agreement to grant 500,000 shares of our common
stock to Mr. Lamar in January 2006.

Mr. Maples' agreement provides for an annual salary of $250,000, a signing bonus
of $50,000, a grant of options to purchase up to 250,000 shares of our common
stock at $2.50 per share, and an agreement to grant 125,000 shares of our common
stock to Mr. Maples in January 2006.

Each of the options described above were granted on June 21, 2005 and have a
term of ten years. The options vest in one-third increments on each of the
first, second and third anniversaries of the date of the option grant. The
options vest in full upon a "change of control" or termination of the
executive's employment by us without "cause."

On June 14, 2005, we entered into a Promotion Agreement with JMBP, Inc. and Mark
Burnett. In connection with the Promotion Agreement, we entered into an Option
Agreement and Warrant Certificate on June 14, 2005 with Mr. Burnett. Under the
Option Agreement, SLS granted Mr. Burnett 1,000,000 options for shares of our
common stock at an exercise price of $2.05 per share, subject to certain
adjustments specified in the Option Agreement. Under the Warrant Certificate, we
granted to Mr. Burnett warrants to purchase 1,000,000 shares of our common stock
at an exercise price of $6.50 per share, subject to certain adjustments
specified in the Warrant Certificate. Forty percent of the options and warrants
vested as of June 14, 2005 and the remainder of the options and warrants vest,
if at all, incrementally based on the achievement of specified milestones. The
vested options and warrants are exercisable at any time, and from time to time,
during the term beginning on June 14, 2005 and ending on June 14, 2010. SLS
issued the options and warrants as part of the consideration for the consulting
and other services SLS is entitled to receive under the Promotion Agreement.
Through September 30, 2005, 100,000 additional options and 100,000 additional
warrants vested based on performance under our agreement.

In order to continue operations, we have been dependent on raising additional
funds, and as discussed above, on January 4, 2005, we completed a private
placement of 15,000 shares of our Series C Convertible Preferred Stock for an
aggregate purchase price of $15 million (net proceeds of $13,340,408). The
investors also received five-year warrants to purchase an aggregate of 6,000,000
shares of our common stock at an exercise price of $6.00 per share, subject to
certain adjustments. The preferred stock is initially convertible, at the
holder's option, into an aggregate of 6,000,000 shares of our common stock, at a
conversion price of $2.50 per share, subject to certain adjustments, and accrues
a 6% premium to the stated value of the shares of preferred stock, which would
be convertible into additional shares of common stock. We may redeem the
warrants (or require the holders to exercise them) and may require holders to
convert the preferred stock to common stock if certain conditions are met.
Through September 30, 2005, holders had converted

                                       19

<PAGE>

550 shares of the Series C Preferred Stock into common stock, leaving 14,450
shares of Series C Preferred Stock outstanding.

In the 2004 first quarter, we entered into an agreement with the owners of SA
Sound B.V. and SA Sound USA, Inc. giving us an option to acquire said companies
at any time prior to February 27, 2004 for a purchase price of 370,000 euros, or
approximately $467,000. We paid approximately $63,000 for this option. The
option agreement entitled us to a refund of the option price if the due
diligence performed disclosed any material adverse facts. After completion of
the due diligence, we determined not to exercise the option to purchase and we
have asserted a right to a refund of the option price. The sellers have
challenged the return of the option fee.

On March 12, 2004, we acquired Evenstar, Inc., by a merger with and into our
newly formed, wholly owned subsidiary, Evenstar Mergersub, Inc. Evenstar is the
owner of one issued patent and a second patent that was issued in September
2004. The patents are for Evenstar's digital amplification technology, which
provides for substantially reduced production costs compared to amplifiers of
comparable quality. In consideration for Evenstar, we paid $300,000 in cash and
issued 300,000 shares of common stock to the stockholders of Evenstar. In
connection with the acquisition, we hired the former president of Evenstar as
the head of our new electronics division, with responsibility for designing and
developing new electronics products. Our ability to integrate Evenstar into our
operations will have a substantial effect on our future performance.

On April 2, 2004, we entered into a strategic alliance agreement with
Bohlender-Graebener Corporation ("BG"). We paid BG $100,000 on April 2, 2004 for
this agreement. The agreement term was for one year and could be extended for
any length of time after the first year by mutual agreement between BG and us.
During the term of the agreement BG was required to work with us, diligently and
in good faith, to consummate a merger. During the first six months of the
agreement, BG was not permitted to solicit any offer to purchase BG, and was not
permitted to respond to any unsolicited offer. In addition to the above, BG
granted us exclusive sales and marketing rights to certain BG products and we
committed to purchase certain minimum quantities of various BG products at
agreed-upon prices. Those purchase commitments were as follows; $175,000 in the
third quarter of 2004, $175,000 in the fourth quarter of 2004, and $200,000 in
the first quarter of 2005. We satisfied all of these purchase commitments. In
the event no agreement to merge the companies on mutually acceptable terms could
be reached before termination of the agreement, BG would be entitled to keep the
$100,000 cash payment as consideration for its performance under the agreement.
In October 2004, we agreed to pay BG an additional $100,000 to extend certain
terms of the strategic alliance agreement. In addition to the $100,000 payment,
we also agreed to purchase 500 additional units of product. In return BG agreed
to extend exclusive merger negotiations by six months, provide exclusivity for
one of its products to us, and provide $100,000 in discounts against future
product purchases. We are currently in negotiations with BG to extend the
agreement.

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
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. On September 30, 2005, we had

                                       20

<PAGE>

$301,705 in cash, and a certificate of deposit for $2,000,000 maturing on
December 10, 2005. With more than $5 million in receivables and inventory free
of any debt we have entered into discussions with commercial banking sources for
a stand by line of credit based on those assets.

In the past, we have been able to privately borrow money from individuals by the
issuance of notes, and we have been able to raise money by the issuance of
preferred stock and common stock. We intend to continue to do so as needed. We
expect that we will need to obtain some amount of additional financing before
the end of the first quarter of 2006 or earlier. However, we cannot be certain
that we will be able to successfully obtain such financing. If we fail to do so,
we may be unable to continue as a viable business, or we may be unable to
proceed with our initiatives to increase our retail sales and our other
initiatives.

CRITICAL ACCOUNTING POLICIES

Our discussion of results of operations and financial condition relies on our
consolidated financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and estimates that
are subject to varying degrees of uncertainty. We believe that investors need to
be aware of these policies and how they impact our financial reporting to gain a
more complete understanding of our financial statements as a whole, as well as
our related discussion and analysis presented herein. While we believe that
these accounting policies are grounded on sound measurement criteria, actual
future events can and often do result in outcomes that can be materially
different from these estimates or judgments. The accounting policies and related
risks described in the notes to our financial statements for the year ended
December 31, 2004 are those that depend most heavily on these judgments and
estimates.

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,
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 our
Annual Report on Form 10-KSB and economic, competitive and other factors
affecting our operations, markets, products and services, expansion strategies
and other factors discussed elsewhere in this report, our Annual Report on Form
10-KSB 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.

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<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our only current borrowing is a note payable on equipment in the principal
amount of $7,293 at September 30, 2005, which bears interest at a fixed rate of
5.16% and matures in September 2008.

We have invested $2,000,000 of current excess cash in one $2,000,000 certificate
of deposit. The CD earns interest at 3.34% per annum and matures on December 10,
2005. The selection of this investment was made with the primary goal of
preservation of principal, while obtaining a fixed yield. On October 14, 2005,
we cashed the CD prior to maturity.

We have no other investments that are subject to market risk.

ITEM 4. CONTROLS AND PROCEDURES.

As of September 30, 2005, our Chief Executive Officer and our 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 each concluded that our disclosure
controls and procedures were effective as of September 30, 2005.

In recent years, we have been required to make restatements and
reclassifications of our financial statements. Such restatements and
reclassifications call into question the effectiveness of our disclosure
controls and procedures. In 2004, we hired a consultant to examine and consider
enhancements to such controls and procedures. The consultant's work will
continue throughout 2005. In 2005, we have hired three new personnel - a Chief
Financial Officer, a Controller, and an Information Technology Director - whose
functions will include improving our controls and procedures.

We have made no changes in our internal control over financial reporting during
the quarter ended September 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

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<PAGE>

                           PART II - OTHER INFORMATION

Item 6. Exhibits.

The following are being filed as exhibits to this Report:

       Exhibit No.                   Description of Exhibit
       -----------   ---------------------------------------------------
       31.1          Rule 13a-14(a) / 15d-14(a) Certifications of Chief
                     Executive Officer

       31.2          Rule 13a-14(a) / 15d-14(a) Certifications of Chief
                     Financial Officer

       32            Section 1350 Certifications

                                       23

<PAGE>

                                    SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                            SLS INTERNATIONAL, INC.
                                            -----------------------
                                            (Registrant)

Date: November 14, 2005                     By: /s/ Michael L. Maples
                                                ---------------------
                                            Michael L. Maples
                                            Chief Financial Officer
                                            (Principal Financial Officer)
















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