SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q/A

                                 Amendment No. 1

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

      For the Quarterly Period Ended September 30, 2005 or

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

             For the Transition Period from _________ to __________

                        Commission File Number: 333-43770

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

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

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

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

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

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

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

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

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

On November 7, 2005, 46,283,310 shares of our common stock were outstanding.

<PAGE>
                             SLS INTERNATIONAL, INC.

EXPLANATORY NOTE

         SLS International, Inc. is filing this Amendment No. 1 to our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2005, as filed with the
U.S. Securities and Exchange Commission on November 14, 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:

         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 nine months ended September 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. Prior versions of the 10-Q recorded $475,000 in
compensation expense for shares transferred to employees by our CEO during the
nine months ended September 30, 2005. 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.
These two changes resulted in a net increase of $648,600 in our net loss for the
nine months ended September 30, 2005.

         This Amendment No. 1 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. 1 does not reflect events that have occurred after
the original filing of the Quarterly Report on Form 10-Q filed on November 14,
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. 1 should be read in
conjunction with the original filing of our Quarterly Report on Form 10-Q and
our other filings made with the Securities and Exchange Commission subsequent to
the filing of the original Quarterly Report on Form 10-Q.

                                      INDEX
                                                                        PAGE NO.
                                                                        --------

                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheet                               3
         Condensed Consolidated Statements of Operations                    5
         Condensed Consolidated Statement of Cash Flows                     7
         Notes to Condensed Consolidated Financial Statements               8

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                               12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk        16

Item 4.  Controls and Procedures                                           17

                           PART II. OTHER INFORMATION

Item 6.  Exhibits                                                          18

Signatures                                                                 21

                                       2
<PAGE>
                             SLS INTERNATIONAL, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                          September 30,     December 31,
                                                                               2005             2004
                                                                          -------------     ------------
                                                                           (unaudited)        (audited)
<S>                                                                       <C>               <C>
Assets
Current assets:
   Cash                                                                   $    301,705      $ 10,712,858
   Certificates of Deposits                                                  2,000,000                --
   Accounts receivable, less allowance for doubtful accounts of
     $45,000 for September 30, 2005 and December 31, 2004                      365,633           271,429
   Inventory                                                                 4,674,498         1,908,588
   Deposits - inventory                                                         58,000            50,000
   Deposits - Merger                                                                --           100,000
   Prepaid expenses and other current assets                                   573,188           192,817
                                                                          ------------      ------------
         Total current assets                                                7,973,024        13,235,692
                                                                          ------------      ------------
Fixed assets:
   Construction in Progress
   Building                                                                  4,161,230                --
   Vehicles                                                                    283,233            51,949
   Equipment                                                                   620,165           234,805
   Leasehold improvements                                                        4,370           245,681
                                                                          ------------      ------------
                                                                             5,068,998           532,435
Less accumulated depreciation                                                  219,111           105,131
                                                                          ------------      ------------
         Net fixed assets                                                    4,849,887           427,304
                                                                          ------------      ------------
         Prepaid Expense                                                        87,914                --
                                                                          ------------      ------------
Total assets                                                              $ 12,910,825      $ 13,662,996
                                                                          ============      ============
Liabilities and Shareholders' Equity
Current liabilities:
   Current maturities of long-term debt and notes payable                 $        760      $     29,101
   Accounts payable                                                            704,665           346,980
   Customer Deposits                                                            76,377                --
   Accrued liabilities                                                             866           630,503
                                                                          ------------      ------------
         Total current liabilities                                             782,668         1,006,584
                                                                          ------------      ------------
   Notes payable, less current maturities                                        7,293            10,951
   Accrued Liabilities Class D Warrants                                         12,804                --
                                                                          ------------      ------------
         Total Long term liabilities                                            20,097            10,951
                                                                          ------------      ------------
         Total liabilities                                                     802,765         1,017,535

Commitments and contingencies:
Temporary Equity:
   Preferred Stock, Series A, $.001 par,
     2,000,000 shares authorized; 76,000 and 346,873 shares
     issued as of September 30, 2005 and December 31, 2004                          76               347
   Contributed Capital - preferred                                             396,225         1,707,367
   Common Stock, $.001 par; 75,000,000 shares authorized;
     2,568,400 shares and 2,568,400 shares issued
     as of September 30, 2005 and December 31, 2004                              2,568             2,568
   Contributed Capital - common                                              1,338,132         1,338,132
   Shareholders' equity:
   Preferred stock, Series B, $.001 par, 1,000,000 shares authorized;
     97,200 shares issued as of September 30, 2005 and 196,050 shares
     issued as of December 31, 2004                                                 97               196
   Preferred stock, Series C, $.001 par 25,000 shares authorized;
     14,450 and no shares issued as of September 30, 2005
     and December 31, 2004                                                          14                --
   Deposits on Preferred stock, series C                                            --         8,849,420
   Contributed capital - preferred                                          16,981,107         5,069,298
   Common stock, $.001 par; 75,000,000 shares authorized;
     43,539,910 shares and 39,184,000 shares issued
     at September 30, 2005 and December 31, 2004                                43,540            39,184
   Common stock not issued but owed to buyers; 1,428,071 shares
     and 183,000 shares at September 30, 2005 and December 31, 2004              1,428               300
   Contributed capital - common                                             30,506,100        20,543,959
   Unamortized cost of stock issued for services                            (1,482,266)       (1,363,973)
   Unamortized cost of stock issued for compensation                        (2,217,971)               --
   Retained deficit                                                        (33,460,990)      (23,541,337)
                                                                          ------------      ------------
         Total shareholders' equity                                         12,108,060        12,645,461
                                                                          ------------      ------------
                                                                          $ 12,910,825      $ 13,662,996
                                                                          ============      ============
</TABLE>

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

                                       3
<PAGE>
                             SLS INTERNATIONAL, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                                        For The Nine Months
                                                        Ended September 30,
                                                  ------------------------------
                                                     2005                2004
                                                  ------------      ------------
                                                           (unaudited)
<S>                                               <C>               <C>
Revenue                                           $  2,889,149      $  1,502,559

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

Gross profit                                           922,484           688,328

General and administrative expenses                  8,981,827         7,438,310
                                                  ------------      ------------

Loss from operations                                (8,059,343)       (6,749,980)

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

                                                     1,394,937            26,729
                                                  ------------      ------------
Loss before income tax                              (6,664,406)       (6,723,252)

Income tax provision                                        --                --
                                                  ------------      ------------
Net loss                                            (6,664,406)       (6,723,252)
                                                  ------------      ------------
Deemed dividend associated with
   beneficial conversion of preferred stock         (3,253,790)       (3,874,061)
   Premium - preferred series C                         (7,678)               --
                                                  ------------      ------------
Net loss available to common shareholders         $ (9,925,874)     $(10,597,313)
                                                  ============      ============

Basic and diluted earnings per share              $      (0.22)     $      (0.34)
                                                  ============      ============

Weighted average shares outstanding                 44,526,987        30,995,380
                                                  ============      ============
</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 Three Months
                                                       Ended September 30,
                                                 ------------------------------
                                                     2005              2004
                                                 ------------      ------------
                                                          (unaudited)
<S>                                              <C>               <C>
Revenue                                          $  1,209,076      $    576,336

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

Gross profit                                          361,289           243,288

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

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

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

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

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

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

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

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

Net loss available to common shareholders        $ (2,657,280)     $ (2,482,724)
                                                 ============      ============

Basic and diluted earnings per share             $      (0.06)     $      (0.07)
                                                 ============      ============

Weighted average shares outstanding                46,839,714        34,851,513
                                                 ============      ============
</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 Nine Months
                                                                             Ended September 30,
                                                                       ------------------------------
                                                                           2005              2004
                                                                       ------------      ------------
                                                                                (unaudited)
<S>                                                                    <C>               <C>
Operating activities:
   Net loss                                                            $ (6,664,406)     $ (6,723,252)
   Adjustments to reconcile net income to cash flows
     from operating activities:
         Depreciation and amortization                                      125,502            38,400
         Amortization of cost of stock issued for services                  398,012           210,012
         Expense of stock options granted for services                    1,395,790         2,719,977
         Compensation expense for stock sold to employees                   475,000                --
         Loss (gain) on disposal of fixed assets                            234,158            (3,000)
         Gain on valuation of D warrants                                 (1,493,308)               --
         Goodwill impairment charge                                              --         1,148,502
   Change in assets and liabilities-
         Accounts receivable, less allowance for doubtful accounts          (94,204)          (87,287)
         Inventory                                                       (2,765,910)       (1,116,130)
         Deposits - Inventory                                                (8,000)         (321,016)
         Deposits - merger                                                  100,000                --
         Prepaid expenses and other current assets                         (468,285)         (108,333)
         Accounts payable                                                   357,685           101,766
         Customer deposits                                                   76,377                --
         Accrued liabilities                                               (616,833)            1,845
                                                                       ------------      ------------
         Cash used in operating activities                               (8,948,422)       (4,138,517)
                                                                       ------------      ------------

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

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

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

Non-cash investing activities:
   Stock issued and options granted for services                       $  1,395,790      $  2,719,977
</TABLE>

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

                                       6
<PAGE>
                             SLS INTERNATIONAL, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

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

NOTE 2 - NOTES PAYABLE

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

NOTE 3 - STOCK TRANSACTIONS

         In July 2003, we entered into an endorsement agreement with the
         recording artist Sting through Steerpike Ltd. The agreement grants
         1,100,000 options in exchange for endorsements of our products. Each
         option is convertible into one share of common stock at a strike price
         of $0.25 and is exercisable for a period of five years. Expense
         associated with the options was recorded over the two-year period of
         the agreement beginning July 31, 2003 and ended June 30, 2005. Expense
         was recorded at fair market value, using the Black-Scholes pricing
         model, on an accelerated method, thereby recording a larger portion of
         the costs in the earlier months of the two-year period. Factors used in
         the Black-Scholes pricing model included: risk-free interest rates of
         3.65% to 3.73%; strike price of $0.25; market prices of $2.04 to $2.26;
         volatility rate of 22.13%; and a yield rate of 0.00%. Consulting
         expense relating to this agreement was $110,600 for the nine months
         ended September 30, 2005. As of September 30, 2005 all of the 1,100,000
         options have been earned and expensed. There will be no further expense
         incurred in 2005.

         In November 2003, an agreement was signed with William Fischbach for
         consulting services to be performed November 10, 2003 to November 2006.
         As compensation for consulting services we issued 400,000 shares of
         common stock on November 11, 2003. Using the market value on the date
         the agreement was signed, the shares were valued at $780,000 and
         recorded as a debit in the equity section of the balance sheet as
         unamortized cost of stock issued for services. The cost is amortized
         over the three-year period of the agreement. Consulting expense
         relating to this agreement was $195,000 for the nine months ended
         September 30, 2005. On September 30, 2005 there was $288,671 remaining
         in unamortized stock issued for services for this agreement. The
         agreement also calls for the issuance of options, not to exceed an
         aggregate of 800,000, to Mr. Fischbach on January 1 of each year based
         on the previous year's performance levels. No options were issued on
         January 1, 2004 or 2005 under this agreement. As of September 30, 2005,
         Mr. Fischbach had earned no options based on his performance in the
         nine months ended September 30, 2005. The agreement also calls for
         additional compensation to Mr. Fischbach in the form of a cash fee of
         2% of the dollar amount of value provided in a merger, acquisition, or
         other transaction resulting directly from Mr. Fischbach's services. As
         of September 30, 2005, Mr. Fischbach had earned no cash fee in the nine
         months ended September 30, 2005.

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

         In December 2004, an agreement was signed with W. Curtis Hargis Co.
         Hargis) for consulting services. As compensation for consulting
         services we agreed to issue 100,000 options upon reaching an agreement
         with a retailer introduced to us by Hargis. This occurred on March 21,


                                       7
<PAGE>

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

         In February of 2005, an agreement was signed with 3CD Consulting, LLC
         for consulting services to be performed November 18, 2004 to November
         17, 2007. As compensation for consulting services the Company issued
         1,000,000 options for shares of common stock. The options have a term
         of 3 years and a strike price of $2. Using the Black-Scholes pricing
         model, the options were valued at $814,781 and recorded as a debit in
         the equity section of the balance sheet as unamortized cost of stock
         issued for services. Factors used in the Black-Scholes pricing model
         included: risk-free interest rate of 3.08%; strike price of $2.00;
         market price of $2.45; volatility rate of 29.73%; and a yield rate of
         0.00%. The expense is amortized over the three-year period of the
         agreement. Consulting expense relating to this agreement was $203,694
         for the nine months ended September 30, 2005. On September 30, 2005,
         there was $579,091 remaining in unamortized cost of stock issued for
         services for this agreement.

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

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

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

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

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

         The provisions of the agreement pertaining to the Class D warrants
         provide for penalties if we fail to keep the registration statement
         effective for the resale of the common stock issuable upon exercise of
         the warrants. Since these provisions provide a settlement alternative
         that would be avoided by the company under other settlement
         alternatives, we are required by EITF 00-19 to record a liability in an
         amount equal to the market value of the Class D warrants. The initial


                                       8
<PAGE>

         amount of this liability is the fair market value as determined by the
         Black-Scholes pricing model amounting to $1,506,112. Subsequent changes
         in the Black-Scholes based market value are to be reported in our
         statement of operations. As of September 30, 2005, using the
         Black-Scholes pricing model produced a value of $12,804. Factors used
         in the Black-Scholes pricing model included: risk-free interest rate of
         3.64% - 4.18%; strike price of $6.00; market price of $$1.91 - $2.79;
         volatility rate of 18.54% - 29.73%%; and a yield rate of 0.00%.
         Consequently the decrease in the original liability of $1,506,112 to
         the September 30, 2005 value of $12,804 resulted in recognition of a
         gain amounting to $1,493,308.

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

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

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

         In the nine months ended September 30, 2005, 90,000 options were
         granted from time to time to Ryan Schinmann for consulting services.
         The options have strike prices equal to the market price on their
         respective grant dates, ranging from $2.04 to $2.51. Using the
         Black-Scholes pricing model, the options were valued at $86,269 and
         recorded as consulting expense. Factors used in the Black-Scholes
         pricing model included: risk-free interest rates of 3.94% to 4.50%;
         strike prices of $2.04 to $2.51; market prices of $2.04 to $2.51;
         volatility rate of 25.87%; and a yield rate of 0.00%. 10,000 additional
         options are to be granted every month until the contract is terminated,
         and the contract is terminable by the Company at will.

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

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

         In June of 2005, we entered into employment agreements with Michael
         Maples, Steven Lamar, and John Gott. Each agreement has a term of three
         years. In the agreements we agreed to pay an aggregate of $150,000 in
         signing bonuses, agreed to issue an aggregate of 1,125,000 shares of
         common stock, and agreed to issue an aggregate of 1,250,000 options.
         The signing bonuses were paid and capitalized as a prepaid expense,
         which will be amortized monthly over the three-year term of each
         agreement. In the nine months ended September 30, 2005, $14,132 was
         recorded in compensation expense. There is $135,868 remaining in
         prepaid expense as of September 30, 2005. The 1,125,000 shares of
         common stock are required to be issued in January 2006 and are
         therefore shown in these financial statements as "stock not issued but
         owed". The shares were valued at $2,418,750, using the market price on
         the date the agreement was signed, and recorded as unamortized cost of
         stock issued for compensation in the equity section of these financial
         statements. The cost will be amortized over the three-year term of the
         agreements. For the nine months ended September 30, 2005, $230,279 was
         amortized into compensation expense. Unamortized cost of stock issued
         for compensation was $2,188,471 as of September 30, 2005. The 1,250,000
         options will be earned evenly over the three-year term of each
         agreement. Each option is convertible into one share of common stock at
         a strike price of $2.50 and is exercisable for a period of ten years.
         Expense associated with the options will be recorded over the
         three-year period of the agreement at fair market value, using the
         Black-Scholes pricing model. Compensation expense relating to options
         earned for the nine months ended September 30, 2005 was $116,038.
         Factors used in the Black-Scholes pricing model included; risk-free


                                       9
<PAGE>

         interest rates of 3.75% - 4.09%; strike price of $2.50; market prices
         of $1.91 - $2.15; volatility rates of 22.13% - 26.73%; and a yield rate
         of 0.00%. Through September 30, 2005, 49,562 of the 1,250,000 options
         have been earned and expensed. Expenses to be recorded in future
         quarters are unknown at this time because the value of the earned
         options will be partly based on the month-end market price.

         In 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 nine months ended September 30,
         2005.

         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 included: risk free
         interest rate of 3.19%; strike price of $.05; market price of $2.04;
         volatility rate of 22.13%; and a yield rate of 0%. The options were
         recorded as consulting expense for the nine months ended September 30,
         2005.

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

         As detailed in Note 3, we have issued or agreed to issue shares of
         common stock and options as part of various consulting agreements. The
         costs of these issuances are recorded as a debit in the equity section
         of the balance sheet as unamortized cost of stock issued for services.
         The balance is amortized into consulting expense over the lives of the
         various consulting agreements. For the nine months ended September 30,
         2005, $1,145,202 was amortized into consulting expense. Unamortized
         cost of stock issued for services was $1,482,266 as of September 30,
         2005.

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

NOTE 5 - CONSULTING, PROMOTIONAL AND INVESTOR RELATIONS SERVICES

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

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

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

NOTE 6 - BUILDING AND RELATED PARTY TRANSACTIONS

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

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

NOTE 7 - TEMPORARY EQUITY - RESCISSION OFFERS

         The Company intends to make a rescission offer to all warrant holders
         who exercised warrants during the period from May 1, 2002 through May
         10, 2004. During such period, the registration statement that the
         Company filed with the US Securities and Exchange Commission to
         register the common stock issuable upon exercise of the warrants may
         not have been "current" because it had not been amended to include the
         Company's most recent audited financial statements. As a result, the
         former warrant holders may be entitled to rescind their purchases and
         the Company has decided to make the rescission offer. Once made, the
         rescission offer is open for 30 days. The rescission offer would
         require the Company to repurchase shares of common stock issued upon
         exercise of warrants at their original exercise price, $.50 for the
         Class A warrants and $3.00 for the Class B warrants, at each warrant
         holder's option. The current market price is well above the $.50
         exercise price of the Class A warrants so no adjustment to the
         financial statements for the year ended December 31, 2004 or the nine
         months ended September 30, 2005 has been made for the rescission offer.
         The current market price is below the $3.00 exercise price of the Class
         B warrants. Only 22,600 Class B warrants were issued in the period,
         making our potential rescission liability to the former Class B Warrant
         holders equal to $67,800 plus interest, which amount would be reduced
         to the extent of any sales of the underlying common stock by the former
         warrant holders. If all warrant holders accepted the rescission offer,
         the Company would be required to pay $1,340,700 plus interest, which
         amount would be reduced to the extent of the proceeds from any sales of


                                       10
<PAGE>

         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. We intend to make
         a rescission offer during 2005 to the holders of all outstanding shares
         of Convertible Preferred Stock, but we do not intend to offer
         rescission to holders who have converted their Convertible Preferred
         Stock to common stock. If all holders of the 76,000 shares of
         Convertible Preferred Stock remaining outstanding on September 30, 2005
         elected rescission at their original purchase price of $2.50 per share,
         the Company would be required to pay an aggregate of $190,000 plus
         interest. Because the current stock price is well above the conversion
         price, no adjustments to these financial statements have been recorded.

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

NOTE 8 - SUBSEQUENT EVENTS

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

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

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS OVERVIEW

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

From the early 1990's through 1999 we derived substantially all of our revenue
from marketing, renting, selling and installing sound and lighting systems under
the name Sound and Lighting Specialist Inc. In June 1999, due to the favorable
customer acceptance of our custom-designed loudspeaker systems, we ceased these
historical operations and began focusing all efforts towards becoming a
loudspeaker manufacturer and selling to dealers and contractors on a wholesale
basis. As a result, we have been essentially in a development stage, as we are
bringing to market products that we introduced in 2000 and 2001 and designing
and bringing to market additional products.

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

The information in this section should be read together with the financial
statements, the accompanying notes to the financial statements and other
sections included in this report.

                              RESULTS OF OPERATIONS

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

For the quarter ended September 30, 2005, revenue increased to $1,209,076 from
$576,336 in the 2004 period, a 110% increase, resulting primarily from the
positive results of a marketing program we started in January 2004 and our
increased production capabilities resulting from facility expansions completed


                                       11
<PAGE>

in 2004 and 2005. Compared to the same quarter of 2004, the most significant
sales increases have occurred in our "core" Pro products which accounted for 44%
of our sales in the quarter ended September 30, 2005. Sales to the Cinema
industry, a new line for 2005, have been very strong exceeding $280,000 for the
third quarter of 2005. During September of 2005 we shipped our new "home theater
in a box, the Q Line Silver to a Fortune 50 Retailer. While we believe this
channel exposure will be significant to our future sales growth, the initial
order was for 400 units to be distributed to 100 test stores throughout the US.
Our quarterly gross profit percentage decreased to approximately 30% in the 2005
period from margins of approximately 42% in the 2004 period, primarily due to
unusually high profit margins in the 2004 period.

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

                                                        Three Months Ended
                                                    ----------------------------
                                                    September 30,  September 30,
                                                        2005           2004
                                                    -------------  -------------
NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued
   for consulting and investor relation services     $  246,661     $  373,412
Charges for options and stock issued and
   sold to directors/employees                          394,229             --
                                                     ----------     ----------

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

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

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

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

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

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

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

Revenue increased to $2,889,149 from $1,502,559 in the first nine months of
2005, a 92% increase, resulting primarily from the positive results of a new
marketing program we started in January 2004 and our increased production
capabilities resulting from facility expansions completed in 2004 and 2005. Most
significant sales increases have occurred in our "core" Pro and RLA products
which accounted for over 50% of our sales in the nine months ended September 30,
2004 and 2005. Sales to the Cinema industry, a new line for 2005, have been
strong, exceeding $500,000 for the first nine months of 2005. During September
of 2005 we shipped our new "home theater in a box, the Q Line Silver to a
Fortune 50 Retailer. Our gross profit percentage decreased to approximately 32%
in the 2005 period from approximately 46% in the 2004 period, primarily due to
unusually high profit margins in the 2004 period.

                                       12
<PAGE>

General and administrative expenses for the first nine months of 2005 increased
to $8,981,827 from $7,438,310 in the 2004 period. The increase resulted
primarily from increased advertising expenses as well as increases in costs to
support our new facility and new management structure. The costs for the nine
months of 2004 includes a one-time impairment charge of $1,148,502 recognized in
the first half of 2004 related to the Evenstar, Inc. acquisition.

                                                      Nine Months Ended
                                                ----------------------------
                                                September 30,  September 30,
                                                    2005           2004
                                                -------------  -------------
NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued for
   consulting and investor relation services     $2,268,802     $3,153,453
Charges for options and stock issued and
   sold to directors/employees                      630,817         87,786
Impairment charge - Evenstar, Inc.                       --        848,502
                                                 ----------     ----------

Total non-cash G&A expense                        2,899,619      4,089,741
                                                 ----------     ----------

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

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

Total G&A expense                                $8,981,827     $7,438,310
                                                 ==========     ==========

As shown in the preceding table, our non-cash G&A expenses have decreased
$1,190,122. Cash G&A costs increased significantly due to a number of branding
and advertising programs, increased promotional costs, and consulting costs due
to infrastructure development and compliance issues. The increased advertising
costs included expenses for image and branding programs directed at the retail
market in connection with planned product launches in retail outlets in late
2005 and early 2006 (approximately $523,000 in the 2005 period), demo and
promotional equipment costs ($237,000 in the 2005 period), and preparation and
videos and collateral materials explaining our technology ($100,000 in the 2005
period). The increase in other cash G&A costs include increased labor and
related costs (approximately $592,000), trade shows and travel ($397,000), and
increased operating costs at our new facility ($487,000).

The combined factors of increased revenue offset by the increase in general and
administrative costs resulted in a Loss from Operations for the nine months
ended September of 2005 amounting to $8,059,343 compared to $6,749,980 loss for
the same period of 2004.

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

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

FINANCIAL CONDITION

On September 30, 2005, our current assets exceeded current liabilities by
$7,190,356 compared to an excess of $12,229,108, on December 31, 2004. Total
assets exceeded total liabilities by $12,108,060, compared to an excess of total


                                       13
<PAGE>

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

Our operations used cash of $10,411,153 for the first nine months of 2005 which
was primarily attributable to the net loss of $6,664,406 recognized during the
period; an increase in inventory of $2,765,910; a reduction of accrued
liabilities by $616,833, as we paid a $600,000 liability accrued at December 31,
2004 for a finder's fee in connection with the January 2005 private placement;
and an increase in prepaid expenses and other current assets of $468,285
primarily related to prepaid advertising associated with our national branding
campaign, deposits and prepaid insurance. We wrote off the $100,000 paid to
Bohlender-Graebener Corporation upon expiration of our agreement. On September
30,2005, we had a backlog of orders of approximately $108,698 compared to a
backlog of $200,000 at this same time last year.

We have experienced operating losses and negative cash flows from operating
activities in all recent years. The losses have been incurred due to the
development time and costs in bringing our products through engineering and to
the marketplace.

On June 17, 2005, we entered into employment agreements with John M. Gott, our
Chairman and Chief Executive Officer; Steven M. Lamar, our newly hired
President; and Michael L. Maples, our newly hired Chief Operating Officer and
Chief Financial Officer. Each employment agreement has a term of three years and
severance payments equal to six months of base salary following a termination by
us without "cause" or a termination by the executive for "good reason." Mr.
Gott's agreement provides for an annual salary of $180,000, an increase from his
previous salary of $96,000; a grant of options to purchase up to 500,000 shares
of our common stock at $2.50 per share; and an agreement to grant 500,000 shares
of our common stock to Mr. Gott in January 2006.

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

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

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

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

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


                                       14
<PAGE>

have asserted a right to a refund of the option price. The sellers have
challenged the return of the option fee.

On March 12, 2004, we acquired Evenstar, Inc., by a merger with and into our
newly formed, wholly owned subsidiary, Evenstar Mergersub, Inc. Evenstar is the
owner of one issued patent and a second patent that was issued in September
2004. The patents are for Evenstar's digital amplification technology, which
provides for substantially reduced production costs compared to amplifiers of
comparable quality. In consideration for Evenstar, we paid $300,000 in cash and
issued 300,000 shares of common stock to the stockholders of Evenstar. In
connection with the acquisition, we hired the former president of Evenstar as
the head of our new electronics division, with responsibility for designing and
developing new electronics products. Our ability to integrate Evenstar into our
operations will have a substantial effect on our future performance. On April 2,
2004, we entered into a strategic alliance agreement with Bohlender-Graebener
Corporation ("BG"). We paid BG $100,000 on April 2, 2004 for this agreement. The
agreement term was for one year and could be extended for any length of time
after the first year by mutual agreement between BG and us. During the term of
the agreement BG was required to work with us, diligently and in good faith, to
consummate a merger. During the first six months of the agreement, BG was not
permitted to solicit any offer to purchase BG, and was not permitted to respond
to any unsolicited offer. In addition to the above, BG granted us exclusive
sales and marketing rights to certain BG products and we committed to purchase
certain minimum quantities of various BG products at agreed-upon prices. Those
purchase commitments were as follows; $175,000 in the third quarter of 2004,
$175,000 in the fourth quarter of 2004, and $200,000 in the first quarter of
2005. We satisfied all of these purchase commitments. In the event no agreement
to merge the companies on mutually acceptable terms could be reached before
termination of the agreement, BG would be entitled to keep the $100,000 cash
payment as consideration for its performance under the agreement. In October
2004, we agreed to pay BG an additional $100,000 to extend certain terms of the
strategic alliance agreement. In addition to the $100,000 payment, we also
agreed to purchase 500 additional units of product. In return BG agreed to
extend exclusive merger negotiations by six months, provide exclusivity for one
of its products to us, and provide $100,000 in discounts against future product
purchases. We are currently in negotiations with BG to extend the agreement.

There is intense competition in the speaker business with other companies that
are much larger and national in scope and have greater financial resources than
we have. We will require additional capital to continue our growth in the
speaker market. We are relying upon our ability to obtain the necessary
financing through the issuance of equity and upon our relationships with our
lenders to sustain our viability. On September 30, 2005, we had $301,705 in
cash, and a certificate of deposit for $2,000,000 maturing on December 10, 2005.
With more than $5 million in receivables and inventory free of any debt we have
entered into discussions with commercial banking sources for a stand by line of
credit based on those assets.

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

CRITICAL ACCOUNTING POLICIES

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

FORWARD-LOOKING INFORMATION

This report, as well as our other reports filed with the SEC and our press
releases and other communications, contain forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Forward-looking statements include all statements regarding our
expected financial position, results of operations, cash flows, dividends,
financing plans, strategy, budgets, capital and other expenditures, competitive
positions, growth opportunities, benefits from new technology, plans and
objectives of management, and markets for stock. These forward-looking
statements are based largely on our expectations and, like any other business,
are subject to a number of risks and uncertainties, many of which are beyond our
control. The risks include those stated in the "Risk Factors" section of our
Annual Report on Form 10-KSB and economic, competitive and other factors
affecting our operations, markets, products and services, expansion strategies
and other factors discussed elsewhere in this report, our Annual Report on Form
10-KSB and the other documents we have filed with the Securities and Exchange
Commission. In light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this report will in fact prove
accurate, and our actual results may differ materially from the forward-looking
statements.

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<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

We have invested $2,000,000 of current excess cash in one $2,000,000 certificate
of deposit. The CD earns interest at 3.34% per annum and matures on December 10,
2005. The selection of this investment was made with the primary goal of
preservation of principal, while obtaining a fixed yield. On October 14, 2005,
we cashed the CD prior to maturity. We have no other investments that are
subject to market risk.

ITEM 4.  CONTROLS AND PROCEDURES.

As of September 30, 2005, our Chief Executive Officer and our Chief Financial
Officer evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer each concluded that our disclosure
controls and procedures were effective as of September 30, 2005.

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

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

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<PAGE>
                           PART II - OTHER INFORMATION

Item 6.  Exhibits.

The following are being filed as exhibits to this Report:

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

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

          32         Section 1350 Certifications

                                       17
<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: September 20, 2006                           By: /s/ Michael L. Maples
                                                   -----------------------------
                                                   Michael L. Maples
                                                   Chief Financial Officer
                                                   (Principal Financial Officer)

                                       18