SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q/A
                                 AMENDMENT NO. 2

(Mark One)

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

    For the Quarterly Period Ended June 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  [ ]

On August 10, 2005, 44,808,310 shares of our common stock were outstanding.

<PAGE>

                                EXPLANATORY NOTE

         SLS International, Inc. is filing this Amendment No. 2 to our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2005, as filed with the U.S.
Securities and Exchange Commission on August 15, 2005 and previously amended on
August 30, 2005, to re-classify warrants issued in January 2005 as a long-term
liability in accordance with EITF 00-19. This Amendment No. 2 responds to
comments of the Staff of the Securities and Exchange Commission in connection
with its review of our Annual Report on Form 10-KSB for the year ended December
31, 2004. This re-classification has resulted in the following changes to our
financial statements:

         o        On our balance sheet, we now show a new long-term liability
                  "Accrued liability - D Warrants."

         o        On our balance sheet dated June 30, 2005, total liabilities
                  increased, contributed capital - common decreased, retained
                  deficit decreased, and total shareholders' equity decreased.

         o        On our statement of operations for each of the three months
                  ended June 30, 2005 and the six months ended June 30, 2005, we
                  now show a "Gain on valuation of D warrants," which resulted
                  in an increase in other income, and decreases in loss before
                  income tax, net loss, net loss available to common
                  shareholders, and basic and diluted loss per share.

         o        On our statement of cash flows, the net loss is decreased, and
                  is completely offset by a new line for "Gain on valuation of D
                  warrants."

         A further description of this classification as a long-term liability
is provided in the revised tenth paragraph of Note 3 to the financial
statements.

         This Amendment No. 2 affects the original financial statements and the
footnotes as originally filed, only to the extent described above. We have also
made revisions to Management's Discussion and Analysis of Financial Condition
and Results of Operations to reflect these changes in our financial statements.
This Amendment No. 2 does not reflect events that have occurred after the
original filing of the Quarterly Report on Form 10-Q filed on August 15, 2005
and does not modify or update the disclosures in the Quarterly Report on Form
10-Q as filed in any way except with regard to the specific modifications
described in this Explanatory Note. This Amendment No. 2 should be read in
conjunction with the original filing of our Quarterly Report on Form 10-Q,
Amendment No. 1 thereto filed August 30, 2005, and our other filings made with
the Securities and Exchange Commission subsequent to the filing of the original
Quarterly Report on Form 10-Q.

<PAGE>
                             SLS INTERNATIONAL, INC.

                                      INDEX

                          PART I. FINANCIAL INFORMATION

                                                                        PAGE NO.
                                                                        --------
Item 1.  Financial Statements

         Condensed Consolidated Balance Sheet                             3
         Condensed Consolidated Statements of Operations                 4-5
         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      18

Item 4.  Controls and Procedures                                         19

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                               20

Item 4.  Submission of Matters to a Vote of Security Holders             20

Item 6.  Exhibits                                                        20

Signatures                                                               21

                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                            SLS INTERNATIONAL, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                                  June 30,        December 31,
                                                                                    2005              2004
                                                                                ------------      ------------
                                                                                (unaudited)        (audited)
<S>                                                                             <C>               <C>
Assets
Current assets:
    Cash                                                                        $  1,807,915      $ 10,712,858
    Certificates of deposit                                                        4,500,000                --
    Accounts receivable, less allowance for
      doubtful accounts of $45,000 as of
      June 30, 2005 and December 31, 2004                                            497,554           271,429
    Inventory                                                                      2,708,115         1,908,588
    Deposits - inventory                                                             194,240            50,000
    Deposits - merger                                                                     --           100,000
    Prepaid expenses and other current assets                                        950,754           192,817
                                                                                ------------      ------------
              Total current assets                                                10,658,579        13,235,692
                                                                                ------------      ------------
Fixed assets:
    Building                                                                       4,161,230                --
    Vehicles                                                                         283,233            51,949
    Equipment                                                                        405,833           234,805
    Leasehold improvements                                                                --           245,681
                                                                                ------------      ------------
                                                                                   4,850,296           532,435
Less accumulated depreciation                                                        177,277           105,131
                                                                                ------------      ------------
              Net fixed assets                                                     4,673,019           427,304
                                                                                ------------      ------------

Prepaid expenses                                                                     126,186                --
                                                                                ------------      ------------

                                                                                $ 15,457,784      $ 13,662,996
                                                                                ============      ============

Liabilities and Shareholders' Equity
Current liabilities:
    Current maturities of long-term debt                                        $        760      $     29,101
    Accounts payable                                                                 921,215           346,980
    Customer deposits                                                                150,275                --
    Accrued liabilities                                                               23,410           630,503
                                                                                ------------      ------------
              Total current liabilities                                            1,095,660         1,006,584

Accrued liability - D warrants                                                       237,662                --
Notes payable, less current maturities                                                 8,512            10,951
                                                                                ------------      ------------
                                                                                   1,341,834         1,017,534
                                                                                ------------      ------------
Commitments and contingencies:
Shareholders' equity:
    Preferred stock, Series A, $.001 par, 2,000,000 shares
      authorized; 153,000 and 346,873 shares issued as of
      June 30, 2005 and December 31, 2004                                                153               347
    Preferred stock, Series B, $.001 par, 1,000,000 shares
      authorized; 182,200 and 196,050 shares issued as of
      June 30, 2005 and December 31, 2004                                                182               196
    Preferred stock, Series C, $.001 par, 25,000 shares
      authorized; 14,450 and no shares issued as of
      June 30, 2005 and December 31, 2004                                                 14                --
    Deposits on Preferred stock, Series C                                                 --         8,849,420
    Contributed capital - preferred                                               19,943,041         6,776,665
    Common stock, $.001 par; 75,000,000 shares authorized;
      44,488,310 shares and 41,751,080 shares issued as of
      June 30, 2005 and December 31, 2004                                             44,489            41,752
    Common stock not issued but owed; 1,428,071 and
      300,000 shares at June 30, 2005 and December 31, 2004                            1,428               300
    Contributed capital - common                                                  28,326,499        21,882,091
    Unamortized cost of stock issued for services                                 (1,656,168)       (1,363,973)
    Unamortized cost of stock issued for compensation                             (2,390,034)               --
    Retained deficit                                                             (30,153,654)      (23,541,337)
                                                                                ------------      ------------
              Total shareholders' equity                                          14,115,950        12,645,461
                                                                                ------------      ------------
                                                                                $ 15,457,784      $ 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
<TABLE>
<CAPTION>
                                                       For the Three Months
                                                          Ended June 30,
                                                  ------------------------------
                                                      2005               2004
                                                  ------------      ------------
<S>                                               <C>               <C>
Revenue                                           $    855,353      $    505,306
Cost of sales                                          632,716           228,266
                                                  ------------      ------------
Gross profit                                           222,637           277,040
General and administrative expenses                  1,987,485         2,912,239
                                                  ------------      ------------
Loss  from  operations                              (1,764,848)       (2,635,199)

Other income (expense):
      Interest expense                                      --              (514)
      Interest and miscellaneous, net                   18,162            11,327
      Gain on valuation of D warrants                  368,522                --
      Gain (loss) on disposal of fixed assets         (234,158)            3,000
                                                  ------------      ------------
                                                       152,527            13,813
                                                  ------------      ------------

Loss before income tax                              (1,612,322)       (2,621,386)
Income tax provision                                        --                --
                                                  ------------      ------------
Net loss                                            (1,612,322)       (2,621,386)
                                                  ------------      ------------
Deemed dividend associated with
   beneficial conversion of preferred stock                 --        (1,737,908)
                                                  ------------      ------------
Net loss availiable to common shareholders        $ (1,612,322)     $ (4,359,294)
                                                  ============      ============

Basic and diluted loss per share                  $      (0.04)     $      (0.15)
                                                  ============      ============

Weighted average shares outstanding                 44,552,714        29,280,447
                                                  ============      ============
</TABLE>

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

                                       4
<PAGE>
                            SLS INTERNATIONAL, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                                         For the Six Months
                                                           Ended June 30,
                                                  ------------------------------
                                                      2005               2004
                                                  ------------      ------------
<S>                                               <C>               <C>
Revenue                                           $  1,680,073      $    926,222
Cost of sales                                        1,118,878           481,182
                                                  ------------      ------------
Gross profit                                           561,195           445,040
General and administrative expenses                  5,019,915         5,868,928
                                                  ------------      ------------
Loss  from  operations                              (4,458,720)       (5,423,888)

Other income (expense):
      Interest expense                                    (438)           (1,019)
      Interest and miscellaneous, net                   66,339            16,703
      Gain on valuation of D warrants                1,268,450                --
      Gain (loss) on disposal of fixed assets         (234,158)            3,000
                                                  ------------      ------------
                                                     1,100,193            18,684
                                                  ------------      ------------
Loss before income tax                              (3,358,526)       (5,405,204)
Income tax provision                                        --                --
                                                  ------------      ------------
Net loss                                            (3,358,526)       (5,405,204)
                                                  ------------      ------------
Deemed dividend associated with
   beneficial conversion of preferred stock         (3,246,112)       (2,709,385)
Premium - preferred series C                            (7,678)               --
                                                  ------------      ------------
Net loss availiable to common shareholders        $ (6,612,316)     $ (8,114,589)
                                                  ============      ============

Basic and diluted loss per share                  $      (0.15)     $      (0.28)
                                                  ============      ============

Weighted average shares outstanding                 43,535,818        29,067,313
                                                  ============      ============
</TABLE>

              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 Six Months
                                                                               Ended June 30,
                                                                       ------------------------------
                                                                           2005              2004
                                                                       ------------      ------------
<S>                                                                    <C>               <C>
Operating activities:
     Net loss                                                          $ (3,358,526)     $ (5,405,203)
     Adjustments to reconcile net income to cash flows
       from operating activities:
         Depreciation and amortization                                       83,668            25,309
         Amortization of cost of stock issued for services                  427,805           140,008
         Expense of stock & options granted for services                    916,335         2,416,569
         Compensation expense for stock sold to employees                   475,000                --
         Gain on disposal of fixed assets                                   234,158            (3,000)
         Goodwill impairment charge                                              --         1,148,502
         Gain on valuation of D warrants                                 (1,268,450)               --
     Change in assets and liabilities:
         Accounts receivable, less allowance for doubtful accounts         (226,125)          (77,975)
         Inventory                                                         (799,527)         (427,969)
         Deposits - inventory                                              (144,240)         (220,457)
         Deposits - merger                                                  100,000                --
         Prepaid expenses and other current assets                         (884,124)               --
         Accounts payable                                                   574,234          (101,130)
         Customer deposits                                                  150,275                --
         Accrued liabilities                                               (607,092)           16,437
                                                                       ------------      ------------
         Cash used in operating activities                               (4,326,608)       (2,488,909)
                                                                       ------------      ------------
Investing activities:
     Investment in certificates of deposit                               (4,500,000)               --
     Proceeds from disposal of fixed assets                                      --             3,000
     Additions of fixed assets                                           (4,563,541)         (148,458)
                                                                       ------------      ------------
         Cash provided by (used in) investing activities                 (9,063,541)         (145,458)
                                                                       ------------      ------------
Financing activities:
     Sale of stock, net of expenses                                       4,515,988         4,928,350
     Acquistion of subsidiary                                                    --          (400,000)
     Repayments of notes payable                                            (30,780)           (2,107)
                                                                       ------------      ------------
         Cash provided by financing activities                            4,485,208         4,526,243
                                                                       ------------      ------------
Increase (decrease) in cash                                              (8,904,942)        1,891,876
Cash, beginning of period                                                10,712,858         1,482,786
                                                                       ------------      ------------
Cash, end of period                                                    $  1,807,915      $  3,374,662
                                                                       ============      ============
Supplemental cash flow information:
     Interest paid                                                     $      8,388      $         --
     Premium -preferred series C paid in common stock                         7,678                --

Noncash investing activities:
     Stock issued and options granted for services                     $    916,335      $  2,416,569
</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 June 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 June 30, 2005 and results of operations and
         cash flows for the six months ended June 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 $9,272 as of December 31, 2004 and June 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 six months ended June 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 six months
         ended June 30, 2005. As of June 30, 2005 all of the 1,100,000 options
         have been earned and expensed.

         In November 2003, an agreement was signed with William Fischbach for
         consulting services to be performed November 10, 2003 to November 10,


                                       7
<PAGE>

         2006. As compensation for consulting services we issued 400,000 shares
         of common stock 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 $130,000 for the six months ended June
         30, 2005. On June 30, 2005 there was $353,671 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 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 June 30, 2005, Mr. Fischbach had earned no
         options based on his performance in the six months ended June 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 June 30, 2005, Mr. Fischbach had earned
         no cash fee based on the value provided to us in the six months ended
         June 30, 2005.

         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 one 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. As of June
         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 six months ended June
         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% of the net sales realized from the retailer. As of
         June 30, 2005, Hargis had earned no cash fee based on the value
         provided to us in the six months ended June 30, 2005.

         In October of 2004, an agreement was signed with Atlantic Services,
         Ltd. for consulting services to be performed October 15, 2004 to
         January 15, 2005. As compensation for consulting services the Company
         agreed to issue 300,000 shares of common stock. As of June 30, 2005
         these shares have not been issued and are therefore listed in these
         financial statements as common stock not issued but owed to buyers.


                                       8
<PAGE>

         Using the market value on the date the agreement was signed, the shares
         were valued at $480,000 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-month period of the agreement.
         Consulting expense relating to this agreement was $80,000 for the six
         months ended June 30, 2005. On June 30, 2005, there was no remaining
         balance in unamortized cost of stock issued for services for this
         agreement.

         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 agreed to
         issue 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 over the three-year period of
         the agreement. Consulting expense relating to this agreement was
         $135,796 for the six months ended June 30, 2005. On June 30, 2005,
         there was $646,989 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
         agreed to issue 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 $72,000 for the six months ended
         June 30, 2005. On June 30, 2005 there was $648,000 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. As of June 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


                                       9
<PAGE>

         expenses related to a finder's fee. The finder was compensated 6% of
         the gross offering funds received, $900,000, and 40,000 warrants for
         every $1,000,000 raised in the offering. The finder received 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 June 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 June 30, 2005, the face value of the 14,450
         outstanding shares is $14,873,530, of which $423,530 is premium. The
         face value of the preferred stock is convertible into common stock at
         $2.50 per share. As a result, on June 30, 2005, the 14,450 outstanding
         shares of preferred stock were convertible into 5,949,412 shares of
         common stock.

         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%. In accordance with EITF 00-19, the
         warrants were recorded as a long-term liability and will be revalued at
         the end of each future quarter. As of June 30, 2005, the warrants were
         valued at $237,662. A gain from the valuation of D warrants of
         $1,268,450 has been recognized in the six months ended June 30, 2005.

         In the six months ended June 30, 2005, 197,873 shares of preferred
         stock, series A, were converted to 1,978,730 shares of common stock.
         There are 153,000 shares of series A preferred stock outstanding as of
         June 30, 2005.

         In the six months ended June 30, 2005, 13,850 shares of preferred
         stock, series B, were converted to 138,500 shares of common stock.
         There are 182,200 shares of series B preferred stock outstanding as of
         June 30, 2005.

         In the six months ended June 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 June 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


                                       10
<PAGE>

         stock. These shares were not issued as of June 30, 2005 and are
         therefore shown in these financial statements as stock not issued but
         owed.

         In the six months ended June 30, 2005, 60,000 options were granted for
         consulting services. The options have a strike price equal to the
         market price on their grant date, ranging from $2.04 to $2.51. Using
         the Black-Scholes pricing model, the options were valued at $61,250 and
         recorded as consulting expense. Factors used in the Black-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%.

         In the six months ended June 30, 2005, 930,000 options were granted to
         directors of the Company. The options have a strike price of $2.50.
         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 quarter ended June 30, 2005 was reduced by
         $490,868 in credits from the expiration of such options for a net
         expense of $196,000 for the six months ended June 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. As of June 30, 2005, none of the vesting
         events had taken place. Using the Black-Scholes pricing model, the
         vested options and warrants were valued at $236,000 and recorded as
         consulting expense for the six months ended June 30, 2005. Factors used
         in the Black-Scholes pricing model included; risk-free interest rate of
         3.89%; strike price of $2.05 for the options and $6.50 for the
         warrants; market price of $2.05; volatility rate of 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 Mike
         Maples, Steven Lamar, and John Gott. Each agreement has a term of three


                                       11
<PAGE>

         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 over the three-year term of each agreement. In
         the six months ended June 30, 2005, $1,780 was recorded in compensation
         expense. There is $148,220 remaining in prepaid expense as of June 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 compensation in the
         equity section of these financial statements. The cost will be
         amortized over the three-year term of the agreements. For the six
         months ended June 30, 2005, $28,716 was amortized into compensation
         expense. Unamortized cost of stock issued for compensation was
         $2,390,034 as of June 30, 2005. The 1,250,000 options will be earned
         evenly over the three-year 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 six months ended June 30, 2005 was
         $11,872. Factors used in the Black-Scholes pricing model included;
         risk-free interest rate of 4.09%; strike price of $2.50; market price
         of $2.15; volatility rate of 22.13%; and a yield rate of 0.00%. As of
         June 30, 2005, 14,840 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 six months ended June 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 six months ended June 30, 2005,


                                       12
<PAGE>

         $427,805 was amortized into consulting expense. Unamortized cost of
         stock issued for services was $1,656,168 as of June 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 six months ended June 30, 2005, $28,716
         was amortized into compensation expense. Unamortized cost of stock
         issued for compensation was $2,390,034 as of June 30, 2005.

NOTE 5 - CONSULTING, PROMOTIONAL AND INVESTOR RELATIONS SERVICES
         Consulting and investor relation services expense was $1,470,956 for
         the six months ended June 30, 2005. Consulting and investor relation
         expenses incurred are detailed below:

         Consulting expenses relating to stock issued for services were $427,805
         (See Note 4) in the six months ended June 30, 2005. Consulting expenses
         relating to options issued for services was $470,736 (See Note 3) for
         the six months ended June 30, 2005.

         Various individuals and corporations performed consulting services and
         investor relation services for us during the six months ended June 30,
         2005 and were paid $572,415 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 - SUBSEQUENT EVENTS
         From July 1, 2005 through August 2, 2005, 8,000 shares of preferred
         stock, series A, were converted to 80,000 shares of common stock.

         From July 1, 2005 through August 2, 2005, 10,000 shares of preferred
         stock, series B, were converted to 100,000 shares of common stock.

         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


                                       13
<PAGE>

         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 six
         months ended June 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 16,600 Class B warrants were issued in the period, so
         any effect of the rescission offer would be immaterial to these
         financial statements, therefore, no adjustment has been made. If all
         warrant holders accepted the rescission offer, the Company would be
         required to pay $1,340,700 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 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. The Company is
         making an assessment of the effects of the delay and will determine
         what actions it will take, if any, to remedy the effects of the delay.
         Because the current stock price is well above the conversion price, no
         adjustments to these financial statements have been recorded.

                                       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 approximately 200 dealers for
our Professional and Commercial lines, 20 dealers for our Home Theater line, and
15 foreign distributors. We recently began 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 June 30, 2005 as compared to the quarter ended June 30, 2004 For
the quarter ended June 30, 2005, revenue increased to $855,353 from $505,306 in
the 2004 period, a 69% 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. Our
gross profit percentage decreased to approximately 26% in the 2005 period from
approximately 55% in the 2004 period, primarily due to unusually high profit
margins in the 2004 period.

General and administrative expenses for the 2005 second quarter decreased to
$1,987,485 from $2,912,239 in the 2004 second quarter, a decrease of $924,754.
The decrease resulted primarily from lower non-cash charges for consulting. The
following table compares categories of our general and administrative expenses
in the second quarter of 2005 to the second quarter of 2004:
<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                          --------------------------
                                                           JUNE 30,         JUNE 30,
                                                             2005             2004
                                                          ---------        ---------
<S>                                                       <C>              <C>
NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued for consulting
   and investor relation services                           473,342        1,680,698
Charges for options and stock issued and
  sold to directors/employees                               220,720           87,786
Impairment charge - Evenstar, Inc.                               --               --
                                                          ---------        ---------

Total non-cash G&A expense                                  694,062        1,768,484

CASH G&A EXPENSE ITEMS:
Consulting and investor relation services                   676,244          421,395
Advertising and promotion                                   218,596           37,902
Acquisitions - SA Sound                                          --               --
Acquisitions - BG deal expired                                   --               --
Impairment charge - Evenstar, Inc.                               --               --
Other cash G&A expenses                                     398,583          684,458
                                                          ---------        ---------

Total cash G&A expense                                    1,293,423        1,143,755
                                                          ---------        ---------

Total G&A expense                                         1,987,485        2,912,239
                                                          =========        =========
</TABLE>

Other income (expense) increased to net other income of $152,527 in the 2005
second quarter as compared to net other income of $13,813 in the 2004 second
quarter, primarily due to a non-cash gain on valuation of D warrants in the
amount of $368,522, partially offset by a $234,158 loss on the disposal of
leasehold improvements made to our previous office and factory facility.

Due principally to the decrease in general and administrative expense, our net
loss decreased to $1,612,322 in the second quarter of 2005 as compared to a net
loss of $2,621,386 in the comparable quarter of 2004.

Six months ended June 30, 2005 as compared to the six months ended June 30, 2004
For the first six months of 2005, revenue increased to $1,680,073 from $926,222


                                       15
<PAGE>

in the first six months of 2004, an 81% increase, resulting primarily from the
positive results of a new marketing program we started in January 2004 and our
increased production capabilities resulting from facility expansions completed
in 2004 and 2005. Our gross profit percentage decreased to approximately 33% in
the 2005 period from approximately 48% in the 2004 period, primarily due to
unusually high profit margins in the 2004 period.

General and administrative expenses for the first six months of 2005 decreased
to $5,019,915 from $5,868,928 in the 2004 period. The decrease resulted
primarily from lower non-cash consulting and investor relations services
expenses and an impairment charge of $1,148,502 recognized in the first half of
2004 related to the Evenstar, Inc. acquisition which was partially offset by an
increase of $911,075 in advertising and promotion expenses. The following table
compares categories of our general and administrative expenses in the first half
of 2005 to the second half of 2004:
<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED
                                                           -----------------------------
                                                            JUNE 30,            JUNE 30,
                                                              2005                2004
                                                           ---------           ---------
<S>                                                        <C>                 <C>
NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued for consulting
   and investor relation services                            898,541           2,335,041
Charges for options and stock issued and
  sold to directors/employees                                711,588              87,786
Impairment charge - Evenstar, Inc.                                --             848,502
                                                           ---------           ---------

Total non-cash G&A expense                                 1,610,129           3,271,329

CASH G&A EXPENSE ITEMS:
Consulting and investor relation services                    997,614             782,995
Advertising and promotion                                  1,031,343             120,268
Acquisitions - SA Sound                                           --             109,165
Acquisitions - BG deal expired                               100,000                  --
Impairment charge - Evenstar, Inc.                                --             300,000
Other cash G&A expenses                                    1,280,829           1,285,171
                                                           ---------           ---------

Total cash G&A expense                                     3,409,786           2,597,599
                                                           ---------           ---------

Total G&A expense                                          5,019,915           5,868,928
                                                           =========           =========
</TABLE>

Other income (expense) increased to net other income of $1,100,193 in the 2005
period as compared to net other income of $18,684 in the 2004 period, primarily
due to a non-cash gain on valuation of D warrants in the amount of $899,928 and
interest earned on cash and certificates of deposit related to cash received
from our private placement of Series C Convertible Preferred Stock, partially
offset by a $234,158 loss on the disposal of leasehold improvements made to our
previous office and factory facility.

Due primarily to the decrease in general and administrative expenses and the
increase in net other income, our net loss decreased to $3,358,526 in the first
half of 2005 as compared to a net loss of $5,405,204 in the first half of 2004.

FINANCIAL CONDITION

On June 30, 2005, our current assets exceeded current liabilities by $9,562,919,
compared to an excess of $12,229,108, on December 31, 2004. Total assets
exceeded total liabilities by $14,115,950, 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 half of 2005, we also invested $231,284 for new
vehicles, $661,209 for improvements to the new headquarters and manufacturing
facility, and $171,028 for new equipment.

Our operations used cash of $4,326,628 for the first half of 2005 which was
primarily attributable to the net loss of $4,626,976 recognized during the
period; an increase in inventory of $799,527; a reduction of accrued liabilities
by $607,092, 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 $884,124 primarily
related to prepaid advertising associated with our national branding campaign.
We also recorded the warrants issued in the January 2005 private placement as a
long-term liability in accordance with EITF 00-19, and revalued the warrants on
June 30, 2005 at $237,662. Deposits - Merger decreased to $0, as we wrote off
the $100,000 paid to Bohlender-Graebener Corporation upon expiration of our
agreement. On June 30, 2005, we had a backlog of orders of approximately
$540,000.

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 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."



                                       16
<PAGE>

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 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 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.

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 June 30, 2005, holders had converted 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 June 30, 2005, we had $1,807,915 in cash, a


                                       17
<PAGE>

certificate of deposit for $2,000,000 maturing on December 10, 2005, a
certificate of deposit for $2,000,000 maturing on January 7, 2006, and a
certificate of deposit for $500,000 maturing on August 21, 2005. We believe this
cash and these securities, totaling $6,307,915, are more than sufficient to fund
our planned operations for at least the next twelve months.

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.
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.

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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our only current borrowing is a note payable on equipment in the principal
amount of $9,272 at June 30, 2005, which bears interest at a fixed rate of 5.16%
and matures in September 2008.

We have invested $4,000,000 of current excess cash in two $2,000,000
certificates of deposit. One CD earns interest at 3.34% per annum and matures on
December 10, 2005, and the other earns interest at 3.00% per annum and matures
on January 7, 2006. The selection of this investment was made with the primary
goal of preservation of principal, while obtaining a fixed yield.

We purchased a $500,000 certificate of deposit that earns interest at 2.75% per
annum and matures on August 21, 2005. This CD is collateral for a line of credit
we have with a supplier.

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

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<PAGE>

ITEM 4.  CONTROLS AND PROCEDURES.

As of June 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 June 30, 2005.

As a result of the audit of our financial statements for the year ended December
31, 2002, we were required to make restatements and reclassifications of our
unaudited financial statements filed for the quarters ended March 31, June 30
and September 30, 2002. 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.

We have made no changes in our internal control over financial reporting during
the quarter ended June 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 1.  LEGAL PROCEEDINGS

In 2004, we completed a private placement of shares of our Series B Preferred
Stock. One of the investors in the private placement was Dr. Christopher H.
Brown. Dr. Brown purchased 20,000 shares of the Series B Preferred Stock for
$50,000. Months after closing the offering, Dr. Brown claimed that he submitted
two separate subscription agreements and two separate checks, one of which was
in the name of Dr. Brown and the other in the name of his professional
corporation, Christopher H. Brown, B.S. Dent., D.D.S., P.A. He specifically
claims that his professional corporation sought to purchase an additional 24,000
shares of our Series B preferred stock for $60,000. We have informed Dr. Brown
that we received only one subscription agreement and one check, and we have
cashed only the one check. Nevertheless, Dr. Brown filed suit against us,
alleging breach of contract and negligence, in the U.S. District Court for the
Western District of North Carolina (Christopher H. Brown, M.D., v. SLS
International, Inc., filed April 29, 2005). His First Amended Complaint seeks
24,000 preferred shares in exchange for his payment of $60,000, or alternatively
"money damages in an amount to be determined at trial, based on SLS' failure to
timely issue [him] 24,000 shares of preferred stock," in addition to other
unspecified relief. Dr. Brown filed his First Amended Complaint after we moved
to dismiss his original complaint and before the Court could rule on our motion.
We will shortly file a motion to dismiss the First Amended Complaint.

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

Our 2005 annual meeting of stockholders was held on June 20, 2005. At the
meeting:

John M. Gott, Robert H. Luke, and Michael L. Maples were re-elected as Directors
for a term of one year.

Votes cast in favor of Mr. Gott's selection totaled 21,638,829 votes, or 98.5%;
while 338,394 votes were withheld.

Votes cast in favor of Mr. Luke's selection totaled 21,636,729 votes or 98.5%;
while 340,494 votes were withheld.

Votes cast in favor of Mr. Maples' selection totaled 21,624,230 votes or 98.4%;
while 352,993 votes were withheld.

The stockholders also voted to:

Ratify the appointment of Weaver & Martin LLC as our independent registered
public accounting firm for the fiscal year ending December 31, 2005. Votes cast
in favor of this ratification were 21,612,979 votes, or 99.9% of the votes cast
on such resolution; while votes cast against were 21,411 and abstentions and
broker non-votes totaled 342,833.

Approve an amendment to the Corporation's Certificate of Incorporation to
increase the number of authorized shares of common stock from 75 million shares
to 125 million shares. Votes cast in favor of approval were 21,317,721 votes, or
97.0%; while votes cast against were 226,228, and abstentions and broker
non-votes totaled 330,274.

Approve the Corporation's 2005 Stock Incentive Plan. Votes cast in favor of
approval were 21,150,786 votes, or 98.1%; while votes cast against were 409,163,
and abstentions and broker non-votes totaled 414,274.

Item 6.  Exhibits.

The following are being filed as exhibits to this Report:

         Exhibit No.            Description of Exhibit
         -----------            ----------------------

         10.1         Employment Agreement, dated June 17, 2005, between SLS
                      International and John M. Gott*

         10.2         Employment Agreement, dated June 17, 2005, between SLS
                      International and Steven Lamar*

         10.3         Employment Agreement, dated June 17, 2005, between SLS
                      International and Michael L. Maples*

         10.4         Form of Nonstatutory Stock Option Agreement under 2005
                      Stock Incentive Plan*

         10.5         Form of Restricted Stock Agreement under 2005 Stock
                      Incentive Plan*

         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
----------
* Filed as an exhibit to our Form 10-Q for the quarter ended June 30, 2005,
  filed August 15, 2005.

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<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 16, 2005                   By /s/ Michael L. Maples
                                             -----------------------------
                                             Michael L. Maples
                                             Chief Financial Officer
                                             (Principal Financial Officer)

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