SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q/A
                                 AMENDMENT NO. 3

(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. 3 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 and November 17, 2005, to properly record certain stock
transactions by our CEO, which for accounting and tax purposes are deemed to
have been made by the company. This re-classification has resulted in the
following changes to our financial statements:

         o        Our CEO granted shares and options to various consultants in
                  the second quarter of 2005, but the transactions were not
                  previously recorded in the 10-Q for the quarter and six months
                  ended June 30, 2005. The recording of this expense results in
                  an increase in general and administrative expense by
                  $1,123,600 and corresponding changes in "common stock paid in
                  capital" and "retained earnings" on the balance sheet.

         o        Prior versions of the 10-Q recorded $475,000 in compensation
                  expense for shares transferred to employees by our CEO. These
                  transfers were voided during 2005, which eliminates the entry
                  for both tax and accounting purposes. This change results in a
                  $475,000 reduction in general and administrative expense and
                  corresponding changes in "common stock paid in capital" and
                  "retained earnings" on the balance sheet.

         o        These two changes resulted in a net increase of $648,600 in
                  our net loss for the quarter and for the six months ended June
                  30, 2005.

         This Amendment No. 3 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. 3 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. 3 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, Amendment No. 2 thereto filed
November 17, 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

SLS International, Inc.
Condensed Consolidated Balance Sheet

<TABLE>
<CAPTION>
                                                                                   June 30,      December 31,
                                                                                     2005            2004
                                                                                 ------------    ------------
Assets                                                                            (unaudited)       (audited)
<S>                                                                              <C>             <C>
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                                                 28,975,099      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                                                            (30,802,254)    (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                2,636,085       2,912,239
                                                ------------    ------------

Loss  from  operations                            (2,413,448)     (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                            (2,260,922)     (2,621,386)

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

Net loss                                          (2,260,922)     (2,621,386)
                                                ------------    ------------

Deemed dividend associated with
   beneficial conversion of preferred stock               --      (1,737,908)
                                                ------------    ------------

Net loss availiable to common shareholders      $ (2,260,922)   $ (4,359,294)
                                                ============    ============


Basic and diluted loss per share                $      (0.05)   $      (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                5,668,515       5,868,928
                                                ------------    ------------

Loss  from  operations                            (5,107,320)     (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                            (4,007,126)     (5,405,204)

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

Net loss                                          (4,007,126)     (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      $ (7,260,916)   $ (8,114,589)
                                                ============    ============


Basic and diluted loss per share                $      (0.17)   $      (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                                                         $ (4,007,126)   $ (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                2,039,935       2,416,569
           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                    $  2,039,935    $  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. Using the market value on the


                                       8
<PAGE>

       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 expenses


                                       9
<PAGE>

       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.

                                       10
<PAGE>

       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 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 the quarter ended June 30, 2005, the company's CEO transferred 55,000
       shares of his personal common stock to various individuals for consulting
       services. For accounting and tax purposes, these transfers are deemed to
       have been made by the Company. The shares were valued using the market
       price at the date the stock was transferred. The stock price ranged from
       $2.15 - $2.40. The shares were valued at $128,250 and recorded as
       consulting expense for the six months ended June 30, 2006.

       In the quarter ended June 30, 2005, the company's CEO granted 500,000
       options to a consultant from his own personal stock. For accounting and
       tax purposes, these transfers are deemed to have been made by the
       Company. Using the Black-Scholes pricing model, the options were valued
       at $995,350. Factors used in the pricing model included: risk free
       interest rate of 3.19%; strike price of $.05; market price of $2.04;


                                       11
<PAGE>

       volatility rate of 22.13%; and a yield rate of 0%. The options were
       recorded as consulting expense for the six months ended June 30, 2006.

       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 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


                                       12
<PAGE>

       $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.

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,
       $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.

                                       13
<PAGE>

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 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
$2,636,085 from $2,912,239 in the 2004 second quarter, a decrease of $276,154.
The decrease resulted primarily from lower non-cash charges for consulting and a
$490,868 credit of non-cash changes for options issued representing the
cancellation of options to two directors which were expensed in the first
quarter of 2005. The following table compares categories of our general and
administrative expenses in the second quarter of 2005 to the second quarter of
2004:

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                      Quarter ended   Quarter ended
                                                      June 30, 2005   June 30, 2004
                                                      -------------   -------------
<S>                                                      <C>             <C>
NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued for consulting
   and investor relation services                        1,596,942       1,680,698
Charges for options and stock issued and sold to
directors/employees                                       (254,280)         87,786
Impairment charge - Evenstar, Inc.                              --              --
                                                        ----------      ----------

Total non-cash G&A expense                               1,342,662       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                                        2,636,085       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 $2,260,922 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
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.

                                       16
<PAGE>

General and administrative expenses for the first six months of 2005 decreased
to $5,668,515 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
                                                     Six months ended  Six months ended
                                                      June 30, 2005     June 30, 2004
                                                     ----------------  ----------------
<S>                                                       <C>             <C>
NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued for consulting
   and investor relation services                         2,022,141       2,335,041
Charges for options and stock issued and sold to
   directors/employees                                      236,588          87,786
Impairment charge - Evenstar, Inc.                               --         848,502
                                                          ---------       ---------

Total non-cash G&A expense                                2,258,729       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                                         5,668,515       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 $4,007,126 in the first
half of 2005 as compared to a net loss of $5,405,204 in the first half of 2004.

                                       17
<PAGE>

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."

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


                                       18
<PAGE>

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.

                                       19
<PAGE>

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,
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.

                                       20
<PAGE>

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.

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<PAGE>

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: August 9, 2006                         By /s/ Michael L. Maples
                                             -----------------------------
                                             Michael L. Maples
                                             Chief Financial Officer
                                             (Principal Financial Officer)

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