Edgar Filing: SLS INTERNATIONAL INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 2004
REGISTRATION NO. 333-108302

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

SLS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 3651 52-2258371

(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

3119 SOUTH SCENIC
SPRINGFIELD, MISSOURI 65807
(417) 883-4549
(Address and telephone number of principal executive offices)

JOHN M. GOTT
3119 SOUTH SCENIC
SPRINGFIELD MISSOURI 65807
(417) 883-4549
(Name, address, and telephone number of agent for service)

JEFFREY M. MATTSON
FREEBORN & PETERS LLP
311 SOUTH WACKER DRIVE, SUITE 3000
CHICAGO, IL 60606-6677
(312) 360-6312

(Name, address, and telephone number for copies of all communications)

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]

CALCULATION OF REGISTRATION FEE

PROPOSED
TITLE OF EACH PROPOSED MAXIMUM AGGREGATE
CLASS OF MAXIMUM MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION

REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE(1) (2)

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Common Stock, 1,100,000 $1.59 $1,749,000 $141.49
$.001 par value

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(1) This price is used solely for the purposes of computing the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act and is
estimated, based on the high and low prices of the common stock on August
20, 2003.

(2) Previously paid.

The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

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PROSPECTUS

SLS INTERNATIONAL, INC.

1,100,000 SHARES OF COMMON STOCK

This prospectus relates to the sale of up to 1,100,000 shares of our
common stock by two selling stockholders. The prices at which the selling
stockholders may sell the shares will be determined by the prevailing market
price for the shares or in negotiated transactions. We will not receive proceeds
from the sale of our shares by the selling stockholders.

Our common stock is quoted on the Nasdaq Over-The-Counter Bulletin
Board under the symbol "SITI.OB." On June 10, 2004, the last reported sale price
for our common stock as reported on the Nasdaq Over-The-Counter Bulletin Board
was $2.86 per share.

THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 4 BEFORE
PURCHASING OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

SLS INTERNATIONAL, INC.
3119 South Scenic
Springfield, Missouri 65807
(417) 883-4549

TABLE OF CONTENTS

SECTION PAGE
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Prospectus Summary 3
Risk Factors 4

Forward-Looking Statements 8
Market for Our Shares 9
Management's Discussions and Analysis of Financial Condition and
Results of Operations 10

Use of Proceeds 14

Business 14

Management 25
Principal Stockholders 28
Certain Transactions with Management and Others 29

Selling Stockholders 29

Plan of Distribution 30
Description of Capital Stock 31

Shares Eligible for Future Sale 35
Legal Matters 35

Experts 35

Further Information 36

Index to Financial Statements F-1

Unless otherwise specified, the information in this prospectus is set forth as
of June 18, 2004, and we anticipate that changes in our affairs will occur
after such date. We have not authorized any person to give any information or to
make any representations, other than as contained in this prospectus, in
connection with the offer contained in this prospectus. If any person gives you
any information or makes representations in connection with this offer, do not
rely on it as information we have authorized. This prospectus is not an offer to
sell our common stock in any state or other jurisdiction to any person to whom
it is unlawful to make such offer.

PROSPECTUS SUMMARY

This summary does not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus including "Risk Factors" and the consolidated financial
statements before making an investment decision.

THE COMPANY

We manufacture premium-quality loudspeakers and sell them through our
dealer networks. The speakers use our proprietary ribbon-driver technology and
are generally recognized in the industry as high-quality systems. We sell a
Professional Line of loudspeakers, a Commercial Line of loudspeakers, Home
Theatre systems, a line for recording and broadcast studios, a line for
contractor installations and touring companies, and line of in-wall, in-ceiling
and outdoor loudspeakers. Our executive offices are located at 3119 South
Scenic, Springfield, Missouri, 65807, with telephone number (417)883-4549.

THE OFFERING

We entered into option agreements with Steerpike (Overseas) Ltd. and
Beth Broday, pursuant to which we granted options to purchase 1,100,000 shares
of our common stock for $0.25 per share. Steerpike and Ms. Broday, the selling
stockholders under this prospectus, are offering for sale up to 1,100,000 shares
of our common stock, which are the shares issuable upon exercise of the options.
Through June 10, 2004, Steerpike had already exercised options for 260,000
shares of our common stock and sold such shares. On June 10, 2004, there were
29,374,780 shares of our common stock outstanding. Upon the selling
stockholders' exercise of the options, the number of shares offered by this
prospectus (840,000 shares, as a result of Steerpike's prior sale of 260,000
shares) represents 2.78% of our total common stock outstanding on June 10, 2004.

OTC BULLETIN BOARD SYMBOL

Our stock trades on the Nasdaq Over-The-Counter Bulletin Board under
the symbol "SITI.OB." On June 10, 2004, the last reported sale price for our
common stock was $2.86 per share.

RESCISSION OFFER

$.50 for the Class A Warrants and $3.00 for the Class B Warrants, at each
warrant holder's option. If all warrant holders accept the rescission offer, we
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. The current market price
is over the $.50 exercise price of the Class A warrants, and if that remains
true, we would expect no former holders of Class A Warrants to accept the
rescission offer. The current market price is below the $3.00 exercise price of
the Class B warrants. Only 22,600 Class B warrants were exercised during the
rescission offer period, making our potential rescission liability to the former
Class B warrant holders equal to $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.

RISK FACTORS

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

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

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

WE WILL DEPEND ON ADDITIONAL CAPITAL.

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

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

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

future distributors may not devote sufficient resources to market our products
effectively and economic or industry conditions may adversely affect their
ability to market or sell for us. A reduction in sales efforts or a
discontinuation of distribution of our products by any distributor could lead to
reduced sales and greater net losses.

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

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

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

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

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

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

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

The accountants' audit report on our financial statements for the year
ended December 31, 2003 included a statement that, because of recurring losses
and our dependency on the sale of securities or obtaining debt financing, there

was a substantial doubt about our ability to continue as a going concern. If we
are unable to raise additional financing to cover operating expenses and derive
additional revenue from sales, we may no longer be a viable business.

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

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

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

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

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

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

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

Our competitors, or others, may have or may acquire patent rights that
they could enforce against us. If our products conflict with patent rights of
others, third parties could bring legal actions against us or our suppliers or
customers, claiming damages and seeking to enjoin manufacturing and marketing of
the affected products. If these legal actions are successful, in addition to any

potential liability for damages, we could be required to alter our products or
obtain a license in order to continue to manufacture or market the affected
products. We may not prevail in any legal action and a required license under
the patent may not be available on acceptable terms or at all. The cost to us of
any litigation or other proceeding relating to intellectual property rights,
even if resolved in our favor, could be substantial.

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

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

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

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

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

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

WE MAY HAVE LIABILITY FOR PRIOR ISSUANCES OF OUR STOCK.

From May 1, 2002 through May 10, 2004, warrant holders exercised
2,545,800 of our Class A Warrants and 22,600 of our Class B Warrants for a total
of 2,568,400 shares of common stock. The warrant holders paid an aggregate of
$1,340,700 for these exercises. From May 1, 2002 through May 10, 2004, the
registration statement that we filed with the U.S. Securities and Exchange
Commission to register the common stock issuable upon exercise of these warrants
may not have been "current" because the registration statement had not been
amended to include our most recent audited financial statements. As a result,
the former warrant holders may be entitled to demand a rescission of their
previous exercises of common stock. We intend to make a rescission offer to all
warrant holders who exercised warrants during the period from May 1, 2002
through May 10, 2004. Once made, the rescission offer is expected to remain open
for 30 days. The rescission offer would require us to repurchase the shares of
common stock issued upon exercise of the warrants at their original exercise
price, $.50 for the Class A Warrants and $3.00 for the Class B Warrants, at each
warrant holder's option. If all warrant holders accepted the rescission offer,
we would be required to pay $1,340,700 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. The current market
price is over the $.50 exercise price of the Class A Warrants, and if that
remains true, we would expect no former holders of Class A Warrants to accept
the rescission offer. The current market price is below the $3.00 exercise price
of the Class B Warrants. Only 22,600 Class B Warrants were exercised during the
rescission offer period, making our potential rescission liability to the former
Class B Warrant holders equal to $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.

FORWARD-LOOKING STATEMENTS

This registration statement, 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 this
registration statement and economic, competitive and other factors affecting our
operations, markets, products and services, expansion strategies and other
factors discussed elsewhere in this registration statement 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 registration statement will in
fact prove accurate, and our actual results may differ materially from the
forward-looking statements.

MARKET FOR OUR SHARES

MARKET INFORMATION

Our common stock is traded on the NASDAQ over-the-counter ("OTC")
Bulletin Board under the symbol "SITI.OB" and our corporate name is SLS
International, Inc. On June 10, 2004, the last reported sale price for our
common stock as reported on the Nasdaq Over-The-Counter Bulletin Board was $2.86
per share. The following table sets forth the range of high and low bid closing
quotations for our common stock on the over-the-counter market for each quarter
within the last two fiscal years. The over-the-counter quotes reflect
inter-dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions.

BID PRICES
--------------------------------
PERIOD LOW HIGH
--------------------------------------------- -------------- ---------------

Quarter Ended March 31, 2004 $2.65 $3.46

Quarter Ended December 31, 2003 1.37 3.92
Quarter Ended September 30, 2003 0.75 1.85

Quarter Ended June 30, 2003 0.19 0.60
Quarter Ended March 31, 2003 0.20 0.45

Quarter Ended December 31, 2002 0.16 0.51
Quarter Ended September 30, 2002 0.23 0.59
Quarter Ended June 30, 2002 0.20 0.84
Quarter Ended March 31, 2002 0.36 0.84

HOLDERS

On March 16, 2004 there were approximately 118 holders of record of our
common stock, based on information furnished by our transfer agent. Shares of
our common stock are also held in "street" name and may, therefore, be held by
numerous beneficial owners.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any cash dividends
in the foreseeable future. Any payment of dividends in the future will be at the
discretion of our board of directors and will be dependent upon our earnings,
financial condition, capital requirements and other factors deemed relevant by
our board of directors.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

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

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

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

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

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

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

YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002

RESULTS OF OPERATIONS

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

General and administrative expenses for 2003 increased to $4,492,238
from $2,468,565 in 2002, primarily as a result of increased expenses for
consulting and investor relation services. In 2003, we spent an aggregate of
$3,104,153 for such services, $1,799,248 of which was non-cash charges related
to the issuance of stock or stock options for such services. In 2002, we spent
an aggregate of $1,303,770 for such services, $1,074,229 of which was non-cash
charges related to the issuance of stock for such services. Services rendered
included promotional services, assistance with product promotion and
distribution, business development services, marketing services, merger and
acquisition services, public relations, investor relations, and capital raising.
Excluding such consulting and investor relations services, our general and
administrative expenses increased by $223,290 in 2003. This increase is
attributed to increases in advertising expenses, accounting and legal expenses,
property lease expenses, equipment lease expenses, and additional employees,
partially offset by a decrease in bad debt expense.

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

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

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

General and administrative expenses for 2002 increased to $2,468,565
from $1,068,335 in 2001, primarily as a result of the write-off of $203,831 of
bad debt expense (compared to $4,000 in 2001) and $1,074,229 of non-cash
expenses amortized in 2002 reflecting a portion of the fair value of stock and
options issued under consulting agreements entered into during 2001 and 2002. A
total of $1,599,213 in expenses were accrued under these consulting agreements,
and the unamortized portion ($524,984) of such expenses will be amortized in
future periods. Other factors causing the increase in general and administrative

expenses include a new employee handling our development of a transducer, a new
controller for our financial operations, a new national sales manager, increased
trade show participation to promote our products, and cash expenses for
consultants targeted toward increased exposure and relations with top musical
artists. Also, during the 2002 third quarter, we increased the size of our
leased facility, thereby increasing our monthly lease costs, which will increase
our capacity to satisfy the expected growth in revenue. Partially offsetting
these increases was the elimination of legal, accounting, consulting and other
costs incurred as a result of our 2001 public offering.

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

FINANCIAL CONDITION

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

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

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

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

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

In addition, we have outstanding warrants, which, upon exercise,
provided additional funding of $1,032,800 in 2003. The shares of common stock
were issued pursuant to a registration statement declared effective by the U.S.
Securities and Exchange Commission in 2001, registration statement number
333-43770. However, from May 1, 2002 through May 10, 2004, such registration
statement may not have been "current" because the registration statement had not
been amended to include our most recent audited financial statements. As a
result, the former warrant holders may be entitled to demand a rescission of
their previous exercises of common stock. We intend to make a rescission offer,
in the second quarter of 2004, to all warrant holders who exercised warrants
during the period from May 1, 2002 through May 10, 2004. Once made, the
rescission offer is expected to remain open for 30 days. The rescission offer
would require us to repurchase the shares of common stock issued upon exercise
of the warrants at their original exercise price, $.50 for the Class A warrants
and $3.00 for the Class B warrants, at each warrant holder's option. If all
warrant holders accepted the rescission offer, we would be required to pay
$1,340,700 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. The current market price is over the $.50
exercise price of the Class A warrants, and if that remains true, we would
expect no former holders of Class A Warrants to accept the rescission offer. The
current market price is below the $3.00 exercise price of the Class B warrants.
Only 22,600 Class B warrants were exercised during the rescission offer period,
making our potential rescission liability to the former Class B warrant holders
equal to $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.

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

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

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

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

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

In March 2004, we commenced an offering of up to 1,000,000 shares of
Series B preferred stock at $20.00 per share. Each share is convertible into ten
shares of our common stock six months after purchase. Prior to conversion, the
shares have no voting rights. Attached to each preferred share are ten of our
class C warrants. Each class C warrant has a term of three years and provides
the right to purchase one share of our common stock at $7.00 per share. The
class C warrants are immediately exercisable and detachable from the preferred
share. If the average closing market price for our common stock is equal to or
greater than $10.50 per share for a period of 30 days, then we are entitled to
repurchase such warrants, with 30 days notice, at a price of $.001 per warrant.
Through April 19, 2004, 167,700 shares of the preferred stock, series B, have
been sold for $3,354,000.

QUARTER ENDED MARCH 31, 2004

RESULTS OF OPERATIONS

Quarter ended March 31, 2004 as compared to the quarter ended March 31,
2003. For the quarter ended March 31, 2004, revenue increased to $420,916 from
$104,777 in the 2003 period, a 302% increase, resulting primarily from the
positive results of a new marketing program we started in January 2004 and our
increased production capabilities resulting from a facilities expansion
completed in December 2003. Our gross profit percentage decreased to
approximately 40% in the 2004 period from approximately 45% in the 2003 period,
primarily as a result of new personnel that were in training and sales of
several large systems at a high promotional discount.

General and administrative expenses for the 2004 first quarter
increased to $2,956,689 from $502,149 in the 2003 first quarter, an increase of
$2,454,540. The increase resulted primarily from a non-cash charge of $1,148,502
for the impairment of goodwill (as further described in Note 7 to the financial
statements); $1,015,943 in consulting and investor relation services expenses
(as further described in Note 6 to the financial statements), $654,343 of which
was non-cash charges for the amortization of stock and options issued under
consulting agreements; and $109,165 in acquisitions expense (as further describe
in Note 7 to the financial statements).

Due to the increase in general and administrative expenses, partially
offset by the revenue increase, our net loss increased to $2,783,818 in the
first quarter of 2004 as compared to a net loss of $454,445 in the comparable
quarter of 2003.

Other income (expense) increased to a net other income of $4,871 in the
2004 first quarter as compared to net other income of $363 in the 2003 first
quarter, primarily due to interest on cash retained upon completion of our
preferred stock private placement in July 2003.

FINANCIAL CONDITION

On March 31, 2004, our current assets exceeded current liabilities by
$3,435,620, compared to an excess of current assets over current liabilities of
$1,945,227, on December 31, 2003. Total assets exceeded total liabilities by
$3,786,615, compared to an excess of total liabilities over total assets of
$2,249,489 on December 31, 2003. The increased working capital was primarily due
to the sale of 143,500 shares of Series B Preferred Stock for net proceeds of
$2,561,250 in the first quarter of 2004. In addition to funding operations, the
proceeds from such sales of stock allowed us to increase cash by $1,209,656,
increase inventory by $258,068, increase net fixed assets by $45,920, and
decrease accounts payable by $53,483. On March 31, 2004, we had a backlog of
orders of approximately $50,000.

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. The report of our accountants contains an explanatory
paragraph indicating that these factors raise substantial doubt about our
ability to continue as a going concern.

In order to continue operations, we have been dependent on raising
additional funds, and as discussed above, we commenced a new private placement
of Series B Preferred Stock in the first quarter of 2004 to raise capital. Each
share is convertible into ten shares of our common stock six months after
purchase. Prior to conversion, the shares have no voting rights. Attached to
each preferred share are ten of our class C warrants. Each class C warrant has a
term of three years and provides the right to purchase one share of our common
stock at $7.00 per share. The class C warrants are immediately exercisable and
detachable from the preferred share. If the average closing market price for our
common stock is equal to or greater than $10.50 per share for a period of 30
days, then we are entitled to repurchase such warrants, with 30 days notice, at
a price of $.001 per warrant.

In the first quarter of 2004, we also received an aggregate of $110,600
in cash in payment of the exercise price for the exercise of outstanding
warrants. The shares of common stock were issued pursuant to a registration
statement declared effective by the U.S. Securities and Exchange Commission in
2001, registration statement number 333-43770. However, from May 1, 2002 through
May 10, 2004, such registration statement may not have been "current" because
the registration statement had not been amended to include our most recent
audited financial statements. As a result, the former warrant holders may be
entitled to demand a rescission of their previous exercises of common stock. We
intend to make a rescission offer, in the second quarter of 2004, to all warrant
holders who exercised warrants during the period from May 1, 2002 through May
10, 2004 (the date that an amendment to the registration statement was declared
effective, making the registration statement "current"). Once made, the
rescission offer is expected to remain open for 30 days. The rescission offer
would require us to repurchase the shares of common stock issued upon exercise
of the warrants at their original exercise price, $.50 for the Class A warrants
and $3.00 for the Class B warrants, at each warrant holder's option. If all
warrant holders accepted the rescission offer, we would be required to pay
$1,340,700 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. The current market price is over the $.50
exercise price of the Class A warrants, and if that remains true, we would

expect no former holders of Class A Warrants to accept the rescission offer. The
current market price is below the $3.00 exercise price of the Class B warrants.
Only 22,600 Class B warrants were exercised during the rescission offer period,
making our potential rescission liability to the former Class B warrant holders
equal to $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.

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, 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 has been
granted and is expected to be issued in the near future. 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.

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.

USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be
offered and sold from time to time by Steerpike. We will receive no proceeds
from the sale of shares of common stock in this offering. However, we may
receive up to $275,000 in proceeds from the selling stockholders' exercise of
the options pursuant to which the shares registered hereby are issuable. Any
proceeds received upon the selling stockholders' exercise of the options will be
used for working capital and general corporate purposes.

BUSINESS

BACKGROUND

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

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

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

RECENT EVENTS

In March 2004, we completed a merger of Evenstar, Inc. into a newly
formed, wholly owned subsidiary. As a result of the merger, we now own, through
the subsidiary, certain technologies and proprietary rights, including those
embodied in one issued patent and one patent application. The technologies

consist of digital amplification technologies that we intend to use in our
loudspeakers and in stereo amplifiers in a product line complementary to our
loudspeakers. We intend to sell these products through our current distribution
channels, as well as through relationships that we expect to develop with mass
merchandisers and real estate developers. In exchange for such technologies, we
paid $300,000 in cash and issued 300,000 shares of our common stock to the
seller. Simultaneously with the acquisition, we hired Joel Butler as director of
our electronics division.

DEVELOPMENT

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

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

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

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

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

o Market acceptance of our ribbon driver products;

o Our ability to compete in quality, price and customer service
for our products;

o Our ability to develop, in a timely manner, new products and
services that keep pace with developments in technology;
o Our ability to meet changing customer requirements; and
o Our ability to enhance our current products and services and
deliver them efficiently through appropriate distribution
channels.

TECHNOLOGY

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

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

The ribbon driver works in a different manner than the compression
driver. The diaphragm of the ribbon driver is a flat piece of mylar plastic or
in the case of SLS ribbon drivers, a high temperature Kapton plastic. These
materials are considerably thinner and lighter than the linen or even the
aluminum or titanium diaphragms of the compression drivers. The ribbon diaphragm
is laminated on one side with a thin coating of aluminum. This aluminum is then

chemically etched to leave wire-like traces of aluminum that act as a voice
coil, vibrating the diaphragm when current is applied. The diaphragm of the
ribbon driver is not in a chamber and is open and visible to the air. The sound
waves are not restricted and therefore they do not have the distorted properties
of the compression driver. Because the diaphragm of the ribbon driver is so thin
and light it reacts very quickly to the electrical signal and does not introduce
new or resonated sounds created by the material of the diaphragm itself. This
enables the ribbon driver to produce a much purer reproduction of the sound
source without adding any tones of its own.

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

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

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

PRODUCTS

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

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

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

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

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

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

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

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

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

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

MANUFACTURING AND SOURCING

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

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

SALES AND MARKETING

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

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

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

We will continue to design and manufacture the same products as
previously sold to end-users for sale through our dealer network. The Universal
Series and Home Theatre lines, part of our Studio Series line, and some models
of our RLA Series line contains our ribbon driver model PRD 500. The
Professional Contractor Loudspeaker line and other models of the RLA Series line
contains our ribbon driver model PRD 1000.

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

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

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

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

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

COMPETITION

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

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

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

PROPRIETARY TECHNOLOGY

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

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

favorable to us, if at all. In addition, we may be forced to commence litigation
in the future to protect our trade secrets or proprietary rights, or to
determine the validity and extent of the proprietary rights of others. Such
possible litigation could result in substantial costs and diversion of our
energy and resources.

EMPLOYEES

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

BUSINESS STRATEGY

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

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

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

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

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

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

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

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

PROPERTY

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

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

LITIGATION

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

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

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

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

John M. Gott 53 President, CEO, CFO and Director

Robert H. Luke, Ph.D. 61 Director
Michael L. Maples 54 Director

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

ROBERT H. (ROBIN) LUKE, PH.D., has served as a Director since 2001. He
is Professor of Marketing and the Department Head of the Marketing Department at
Southwest Missouri State University. He has served as the first Department Head
of two Marketing Departments and directed the development of the MBA/MPA
programs for the University of the Virgin Islands. Dr. Luke has owned and
developed several businesses and regularly consults with major U.S. corporations
and institutions on marketing issues as a Senior Consultant with R.H. Luke &
Associates. He served the Academy of Marketing Science as a member of its Board
of Governors from 1992 to 1996 and as Vice President of Development, Vice
President and Vice President for Academic Affairs. He presently serves as a

Board Member of the Marketing Management Association. He has given or continues
to give service commitments to the Boards of Directors or Boards of Advisors of
the following organizations: Missouri Partnership for Outstanding Schools, Ozark
Greenways, Community Investment Alliance, Sports Directories International, the
Community Foundation of the Ozarks, Vision 20/20, the Downtown Springfield
Association, Ozarks Chapter of the Boy Scouts of America, A+ Advisory Board of
Glendale High School, and Lake County Youth Soccer.

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

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

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

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

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

STATEMENT AS TO INDEMNIFICATION

Section 145 of the Delaware General Corporation Law provides for
indemnification of our officers, directors, employees and agents. In general,
these sections provide that persons who are officers or directors of the
corporation may be indemnified by the corporation for acts performed in their
capacities as such.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or persons controlling us
pursuant to the provisions in our By-Laws, we have been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.

EXECUTIVE COMPENSATION

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

LONG-TERM COMPENSATION
----------------------
COMMON STOCK
NAME & OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(A) AWARDS OF OPTIONS
------------------ ---- ------ ----- --------------- -----------------

John M. Gott 2003 $60,460 $ 0 $11,734 10,000
2002 $50,440 0 $ 3,898 0

---------------
(a) Represents $3,768 in 2003 and $3,898 in 2002 for payments of medical
insurance and $7,966 in 2003 for personal use of a company-owned
automobile.

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

Stock Options. The following table contains information concerning
stock options granted in 2003, including the potential realizable value of each
grant assuming that the market value of our common stock were to appreciate from
the date of grant to the expiration of the option at annualized rates of (a) 5%
and (b) 10%, in each case compounded annually over the term of the option. The
assumed rates of appreciation shown in the table have been specified by the U.S.
Securities and Exchange Commission for illustrative purposes only and are not
intended to predict future stock prices, which will depend upon various factors,

including market conditions and future performance and prospects. Options become
exercisable at the time or times determined by the Compensation Committee of the
Board of Directors; the options shown below were immediately exercisable. All of
the options shown below have purchase prices equal to the fair market value of
our common stock on the date of grant.

------------------------- -------------------------- ---------------------------- ------------------ -----------------
NUMBER OF SHARES OF PERCENT OF TOTAL OPTIONS
COMMON STOCK UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE PRICE
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE EXPIRATION DATE
------------------------- -------------------------- ---------------------------- ------------------ -----------------

John M. Gott 10,000 6.9% $0.25 4/5/2013
------------------------- -------------------------- ---------------------------- ------------------ -----------------

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

------------------------------------------------ ---------------------------------- ----------------------------------
NO. OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT 12/31/03 IN-THE-MONEY OPTIONS AT 12/31/03
(EXERCISABLE/ (EXERCISABLE/
NAME UNEXERCISABLE) UNEXERCISABLE)
------------------------------------------------ ---------------------------------- ----------------------------------

John M. Gott 10,000 / 0 $32,000 / 0
------------------------------------------------ ---------------------------------- ----------------------------------

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information as of January 27,
2004 with respect to the beneficial ownership of our common stock by all persons
known by us to be beneficial owners of more than 5% of the outstanding shares of
our common stock, by directors who own common stock and all officers and
directors as a group:

NUMBER OF PERCENT OF
NAME & ADDRESS SHARES CLASS(1)
----------------------------------- ----------------------- --------------
John M. Gott 10,061,699(2) 35.2%
1020 S. Pickwick
Springfield, MO 65804

Robert H. Luke 16,500(3) *
4885 S. Rhett Road
Rogersville, MO 65742

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

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

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

All such shares are owned directly by the named stockholders.
------------
* Less than one percent

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

(3) Includes options to purchase 10,000 shares at $0.25 per share.

EQUITY COMPENSATION PLANS

On December 31, 2003, we had the following securities issued and
available for future issuance under equity compensation plans:

--------------------------------------------------------------------------------------------------------------------
(C)
NUMBER OF SECURITIES
(A) REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO (B) FUTURE ISSUANCE UNDER EQUITY
BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
OF PRICE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, REFLECTED
WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
--------------------------------------------------------------------------------------------------------------------

EQUITY COMPENSATION 645,000 shares of $0.29 per share 1,355,000 shares of
PLANS APPROVED BY common stock common stock
SECURITY HOLDERS
--------------------------------------------------------------------------------------------------------------------

EQUITY COMPENSATION 840,000 shares of $0.25 per share 0
PLANS NOT APPROVED common stock
BY SECURITY HOLDERS
--------------------------------------------------------------------------------------------------------------------
TOTAL 1,485,000 shares of $0.27 per share of 1,355,000 shares of
common stock common stock common stock
--------------------------------------------------------------------------------------------------------------------

CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS

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

SELLING STOCKHOLDERS

The following table presents information regarding the selling
stockholders. Neither the selling stockholders nor any of their affiliates have
held a position or office, or had any other material relationship, with us.

SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING SHARES SHARES TO BE PERCENTAGE OF SHARES
OWNED BEFORE BENEFICIALLY OWNED SOLD IN THE BENEFICIALLY OWNED
SELLING STOCKHOLDERS OFFERING BEFORE OFFERING (1) OFFERING AFTER OFFERING
--------------------------------------- --------------- --------------------- ------------- ----------------------

Steerpike (Overseas) Ltd. (1) 1,000,000 4.0% 1,000,000 0%
Beth Broday (1) 100,000 0.4% 100,000 0%

------------
(1) Represents shares that may be acquired upon the exercise of outstanding
and fully exercisable options at an exercise price of $0.25 per share.

(2) Percentage of outstanding shares is based on 25,214,528 shares of common
stock, which consists of the number of shares outstanding on August 6,
2003, plus the assumed exercise of the options to purchase 1,100,000
shares held by the selling stockholders.

PLAN OF DISTRIBUTION

The common stock offered by this prospectus is being offered by
Steerpike (Overseas), Ltd., the selling stockholder. The common stock may be
sold or distributed from time to time by the selling stockholder directly to one
or more purchasers or through brokers, dealers, or underwriters who may act
solely as agents at market prices prevailing at the time of sale, at prices
related to the prevailing market prices, at negotiated prices, or at fixed
prices, which may be changed. The sale of the common stock offered by this
prospectus may be effected in one or more of the following methods:

o ordinary brokers' transactions

o transactions involving cross or block trades

o through brokers, dealers, or underwriters who may act solely as agents

o "at the market" into an existing market for the common stock

o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents

o in privately negotiated transactions

o any combination of the foregoing

In order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or licensed brokers
or dealers. In addition, in certain states, the shares may not be sold unless
they have been registered or qualified for sale in the state or an exemption
from the registration or qualification requirement is available and complied
with.

Brokers, dealers, underwriters, or agents participating in the
distribution of the shares as agents may receive compensation in the form of
commissions, discounts, or concessions from the selling stockholder and/or
purchasers of the common stock for whom the broker-dealers may act as agent. The
compensation paid to a particular broker-dealer may be less than or in excess of
customary commissions.

Neither we nor the selling stockholder can presently estimate the
amount of compensation that any agent will receive. We know of no existing
arrangements between the selling stockholder, any other stockholder, broker,
dealer, underwriter, or agent relating to the sale or distribution of the shares
offered by this prospectus. At the time a particular offer of shares is made, a
prospectus supplement, if required, will be distributed that will set forth the
names of any agents, underwriters, or dealers and any compensation from the
selling stockholder and any other required information.

We will pay all of the expenses incident to the registration, offering,
and sale of the shares to the public other than commissions or discounts of
underwriters, broker-dealers, or agents. We have also agreed to indemnify the
selling stockholder and related persons against specified liabilities, including
liabilities under the Securities Act.

We have advised the selling stockholder that while it is engaged in a
distribution of the shares included in this prospectus it is required to comply
with Regulation M promulgated under the Securities Exchange Act of 1934, as
amended. With certain exceptions, Regulation M precludes the selling
stockholder, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the shares offered hereby this
prospectus.

This offering will terminate on the date that all shares offered by
this prospectus have been sold by the selling stockholder.

DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

Our authorized capital stock consists of 75,000,000 shares of common
stock, par value $.001 per share. On March 26, 2004, there were outstanding a
total of 29,128,780 shares of common stock. The holders of shares of common
stock:

o have equal ratable rights to dividends on funds legally available for
dividends, provided dividends are declared by the our Board of
Directors

o are entitled to share proportionately in all of our assets available
for distribution to holders of common stock upon any sale, dissolution
or winding up of our affairs

o do not have priority rights to subscribe for future offerings of shares
of common stock by us

o do not have any priority rights to convert their shares of common stock
into any of our other securities

o do not have rights to subscribe for shares or convert their shares

o have no right to have their shares redeemed by us

o are entitled to one vote per share on all matters upon which
stockholders may vote at all meetings of stockholders

All shares of common stock now outstanding are fully paid for and are
not assessable by us; and all the shares of common stock that are the subject of
this offering, when issued, will be fully paid for and will not be assessable by
us.

The holders of shares of our common stock do not have cumulative voting
rights, which are rights to accumulate votes to be cast for directors in an
election. In this way a stockholder could vote his or her entire total of votes
for one director only, and not vote for any other director. However, because
there is no cumulative voting, the holders of more than 50% of the outstanding
shares, when voting for the election of directors, can elect all of the
directors to be elected, if they so choose. As a result, the holders of the
remaining shares will not be able to elect any of our directors. On January 27,
2004, Mr. Gott owned 35.7% of our common stock. Such a concentration of
ownership could have an adverse effect on the price of the common stock. It may
have the effect of delaying or preventing a change in control, including
transactions in which stockholders might otherwise receive a premium for their
shares over the then current market prices.

Some provisions of our certificate of incorporation and bylaws could
make it more difficult for a third party to acquire us even if a change of
control would be beneficial to our stockholders. These provisions include:

o authorizing the issuance of preferred stock without common stockholder
approval

o prohibiting cumulative voting in the election of directors

o limiting the persons who may call special meetings of stockholders

PREFERRED STOCK

Our authorized capital stock also includes 5,000,000 shares of
preferred stock, $.001 par value, of which 2,000,000 shares have been designated
Series A Preferred Stock and are outstanding on the date of this prospectus. Our
articles of incorporation authorize a class of preferred stock commonly known as
a "blank check" preferred stock. Specifically, the preferred stock may be issued
from time to time by the board of directors as shares of one or more classes or
series. Our board of directors, subject to the provisions of our Certificate of
Incorporation and limitations imposed by law, is authorized to adopt resolutions
to issue the shares; to fix the number of shares; to change the number of shares
constituting any series; to provide for or change the voting powers,
designations, preferences, and relative, participating, optional or other
special rights, qualifications, limitations or restrictions; the dividend
rights, including whether dividends are cumulative; to fix dividend rates; to
fix terms of redemption, including sinking fund provisions; to fix redemption
prices; to fix conversion rights; and to fix liquidation preferences of the
shares constituting any class or series of the preferred stock.

In each such case, we will not need any further action or vote by our
stockholders. One of the effects of undesignated preferred stock may be to
enable the board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of our management.
The issuance of shares of preferred stock pursuant to the board of director's
authority described above may adversely affect the rights of holders of common
stock. For example, preferred stock issued by us may rank prior to the common
stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
the common stock at a premium or may otherwise adversely affect the market price
of the common stock.

We designated 2,000,000 shares as Series A Convertible Preferred Stock.
Such shares were sold from time to time in a private placement that commenced in
September 2001 and concluded in July 2003. The shares are convertible to common
stock one year from the date of purchase at a conversion rate of 10 shares of
common stock for each share of preferred stock.

STOCK OPTION PLAN

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

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

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

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

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

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

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

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

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

WARRANTS

SLS has authorized the issuance and sale of Class A Warrants and Class
B Warrants as part of the units offered. Each warrant provides the right to
purchase one share of common stock at a specified price. The Class A Warrant was
originally exercisable for a term of 6 months at a price of $.50 per share. The
Class B Warrant was originally exercisable for 2 years after exercise of the
attached Class A Warrant at a price of $3.00 per share. Through a series of
extensions, the Class A Warrants and the Class B Warrants are now exercisable
through August 4, 2004. The Class A Warrants and Class B Warrants are
immediately detachable from the common stock but are not separable from each
other until the Class A Warrant is exercised. The Class A Warrants are
immediately exercisable after they are issued. If the Class A Warrant is not
exercised on or prior to August 4, 2004 (or such later date as extended by the
Company), or if the Class A Warrant is redeemed by SLS, the Class A Warrants and
the Class B Warrants shall be void and of no effect.

If the average closing market price for SLS's common stock is at least
equal to the exercise price for the Class A or Class B Warrant for a period of
10 days, then such warrants are capable of being repurchased by SLS at a price
of $.001 per warrant. This repurchase by SLS can occur only after SLS mails a
30-day notice to each holder of the warrants that are to be repurchased.
However, the holder of the warrants can still exercise the warrants during the
30-day notice period.

If SLS issues additional shares to others for any reason, other than a
consolidation, merger, stock split, or sale of all the assets of SLS, the holder
of the warrants will have no rights to purchase any more shares than are
represented by the warrants. In addition, no adjustment or change in the
exercise price of each warrant will be made, except if a stock split is declared
by SLS. In case of a stock split, the exercise price of the warrants shall be
adjusted higher or lower depending upon whether the stock split is a reverse
stock split or forward stock split. A forward stock split means the shares are
being split so that more shares will be outstanding after the stock split. In a
forward stock split, the exercise price of the warrants shall be adjusted to
permit the purchase of more shares of stock for the original exercise price. If
there is a reverse stock split, there will be a reduction in outstanding shares
and the exercise price of the warrant shall purchase fewer shares.

Unless and until a warrant is exercised, each warrant holder will not
own any equity interest in SLS by virtue of his ownership of the warrant. The
warrant holder may not vote as a stockholder. The warrant holder also will not
have rights to any distributions to stockholders unless and until the warrant is
exercised and SLS receives the cash consideration for the purchase of the common
stock. SLS shall reserve such number of shares of common stock as shall be equal
to the number of Class A and Class B Warrants issued. The shares are reserved
for future issuance upon exercise of the warrants. The shares to be issued upon
the exercise of the warrants have also been registered with the Securities and
Exchange Commission. Upon exercise of the warrants, such shares of common stock
issued to exercising investors will be freely tradeable and will not constitute
restricted securities as such terms are defined under the Securities Act. The
sole exception to this will be shares purchased in the offering by officers and
directors of SLS. Such shares purchased by them shall be held by them for
investment.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have 30,21224,780 shares of
common stock issued and outstanding. On June 10, 2004, 15,513,449 of our
outstanding shares are deemed to be restricted shares under the Securities Act
of 1933. The restricted shares will be eligible for sale pursuant to Rule 144 of
the Securities Act at the expiration of the one-year holding period from their
date of acquisition. The one-year holding period for some shares has already
expired. In addition, we have 1,507,360 shares of Series A preferred stock and
167,700 shares of Series B preferred stock outstanding on May 4, 2004. As of May
4, 2004, 377,940 shares of preferred stock have been converted into common stock
and such common stock is eligible for sale pursuant to Rule 144 at the
expiration of the one-year holding period from their date of acquisition.

Pursuant to a Consent Order with the State of Missouri, Mr. Gott agreed
to lockup his shares through May 5, 2005, to be released only upon specified
occurrences, or in increments after May 5, 2003. When eligible under the lock-up
agreement, Mr. Gott, who owns 10,590,736 shares, may only sell up to 2 1/2% of
his outstanding shares in any 3-month period. Such sales would also be subject
to the resale restrictions of Rule 144 of the Securities Act of 1933, as
amended. Future sales may have a negative effect on the price of our shares in
the public market. This may cause the price of our common stock to decline and
may prevent investors from reselling their shares at a profit.

LEGAL MATTERS

Legal matters in connection with this offering will be passed upon by
Freeborn & Peters LLP, 311 South Wacker Drive, Suite 3000.

EXPERTS

The audited financial statements of the Company as of December 31, 2003
and 2002 and for each of the three years in the period ended December 31, 2003
appearing in this prospectus and in the registration statement of which this
prospectus forms a part, have been audited by Weaver & Martin, LLC, independent
public accountants. Their report, which appears elsewhere herein, includes an
explanatory paragraph as to the ability of SLS to continue as a going concern.
The financial statements are included in reliance upon such report and upon the
authority of such firm as an expert in auditing and accounting.

FURTHER INFORMATION

We are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended, and file reports, proxy statements and other
information with the Securities and Exchange Commission. These reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Securities and Exchange
Commission's regional offices. You can obtain copies of these materials from the
Public Reference Section of the Securities and Exchange Commission upon payment
of fees prescribed by the Securities and Exchange Commission. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission's Web site contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission. The address of that site is
http://www.sec.gov.

We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission under the Securities Act with respect to the securities
offered in this prospectus. This prospectus, which is filed as part of a
registration statement, does not contain all of the information set forth in the
registration statement, some portions of which have been omitted in accordance
with the Securities and Exchange Commission's rules and regulations. Statements
made in this prospectus as to the contents of any contract, agreement or other
document referred to in this prospectus are not necessarily complete and are
qualified in their entirety by reference to each such contract, agreement or
other document which is filed as an exhibit to the registration statement. The
registration statement may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission, and copies of
such materials can be obtained from the Public Reference Section of the
Securities and Exchange Commission at prescribed rates.
39

INDEX TO FINANCIAL STATEMENTS

SLS INTERNATIONAL, INC

MARCH 31, 2004

Condensed Balance Sheet F-2
Condensed Statement of Operations F-3
Statement of Cash Flows F-4
Notes to Condensed Financial Statements F-5 - F-9

DECEMBER 31, 2003

Report of Independent Registered Public Accounting Firm F-10
Balance Sheet F-11
Statement of Operations F-12
Statement of Shareholders' Deficit F-13
Statement of Cash Flows F-14
Notes to Financial Statements F-15 - F-35

F-1

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET

March 31, December 31,
2004 2003
------------ ------------
(unaudited) (audited)

Assets
Current assets:
Cash $ 2,692,442 $ 1,482,786
Accounts receivable, less allowance for doubtful accounts of
$45,000 for March 31, 2004 and December 31, 2003 234,367 277,665
Inventory 848,365 590,297
Prepaid expenses and other current assets 19,348 6,850
------------ ------------
Total current assets 3,794,522 2,357,598
------------ ------------
Fixed assets:
Vehicles 73,376 73,376
Equipment 170,999 159,212
Leasehold improvements 220,577 175,621
------------ ------------
464,952 408,209
Less accumulated depreciation 98,839 88,016
------------ ------------
Net fixed assets 366,113 320,193
------------ ------------
$ 4,160,635 $ 2,677,791
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt and notes payable $ 28,871 $ 28,946
Accounts payable 303,804 357,287
Accrued liabilities 26,227 26,138
------------ ------------
Total current liabilities 358,902 412,371
------------ ------------
Notes payable, less current maturities 15,118 15,931
------------ ------------
Commitments and contingencies:
Shareholders' equity:
Preferred stock, Series A, $.001 par, 2,000,000 shares
authorized; 1,511,360 issued as of March 31, 2004 and
1,545,300 issued as of December 31, 2003 1,511 1,545
Preferred stock, Series B, $.001 par, 1,000,000 shares
authorized; 143,500 shares issued as of March 31, 2004
and no shares issued as of December 31, 2003 144 --
Discount on preferred stock (2,257,599) (1,886,576)
Contributed capital - preferred 10,952,719 7,411,585
Common stock, $.001 par; 75,000,000 shares authorized;
29,225,780 shares and 28,230,180 shares issued at
March 31, 2004 and December 31, 2003 29,226 28,231
Common stock not issued but owed to buyers; 18,000 shares and
183,000 shares at March 31, 2004 and December 31, 2003 18 183
Contributed capital - common 10,370,651 8,319,286
Unamortized cost of stock issued for services (711,199) (781,204)
Retained deficit (14,598,856) (10,843,561)
------------ ------------
Total shareholders' equity 3,786,615 2,249,489
------------ ------------
$ 4,160,635 $ 2,677,791
============ ============

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

F-2

SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For The Three Months
Ended March 31,
------------------------------
2004 2003
------------ ------------
(unaudited)

Revenue $ 420,916 $ 104,777

Cost of sales 252,916 57,436
------------ ------------

Gross profit 168,000 47,341

General and administrative expenses 2,956,689 502,149
------------ ------------

Loss from operations (2,788,689) (454,808)

Other income (expense):
Interest expense (505) (7,637)
Interest and miscellaneous, net 5,376 8,000
------------ ------------

4,871 363
------------ ------------

Loss before income tax (2,783,818) (454,445)

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

Net loss (2,783,818) (454,445)
------------ ------------

Deemed dividend associated with
beneficial conversion of preferred stock (971,477) (133,278)
------------ ------------

Net loss availiable to common shareholders $ (3,755,295) $ (587,723)
============ ============

Basic and diluted earnings per share $ (0.13) $ (0.03)
============ ============

Weighted average shares outstanding 28,743,930 23,095,528
============ ============

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

F-3

SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For The Three Months
Ended March 31,
--------------------------
2004 2003
----------- ---------
(unaudited)

Operating activities:
Net loss $(2,783,818) $(454,445)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 10,823 2,704
Amortization of cost of stock issued for services 70,005 246,371
Expense of stock options granted for services 718,088 --
Goodwill impairment charge 1,148,502 --
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts 43,298 138,828
Inventory (258,068) (62,929)
Prepaid expenses and other current assets -- 1,539
Accounts payable (53,483) 69,019
Due to shareholders -- (94)
Accrued liabilities 90 25,007
----------- ---------
Cash used in operating activities (1,104,563) (34,000)
----------- ---------
Investing activities:
Additions of fixed assets (56,743) --
----------- ---------
Cash used in investing activities (56,743) --
----------- ---------
Financing activities:
Sale of stock, net of expenses 2,671,850 82,350
Acquisition of subsidiary (300,000) --
Repayments of notes payable (888) (570)
----------- ---------
Cash provided by financing activities 2,370,962 81,780
----------- ---------
Increase in cash 1,209,656 47,780
Cash, beginning of period 1,482,786 4,240
----------- ---------

Cash, end of period $ 2,692,442 $ 52,020
=========== =========
Supplemental cash flow information:
Interest paid $ -- $ 1,295
Income taxes paid (refunded) -- --

Noncash investing activities:
Stock issued and options granted for services $ 718,088 $ 93,000

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

F-4

SLS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
at March 31, 2004 have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and reflect all adjustments which,
in the opinion of management, are necessary for a fair presentation of
financial position as of March 31, 2004 and results of operations and
cash flows for the three months ended March 31, 2004. 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 2003 financial
statements have been reclassified to conform to the 2004 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, 2003.

NOTE 2 - COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited condensed consolidated financial statements
at March 31, 2004 have been prepared in conformity with U.S. generally
accepted accounting principles which contemplate our continuance as a
going concern. We have suffered losses from operations during the three
months ended March 31, 2004 and the years ended December 31, 2003,
2002, and 2001. Our cash position may be inadequate to pay all of the
costs associated with establishing a market for sales of its
loudspeakers. Management intends to use borrowings and security sales
to mitigate the effects of its cash position, however no assurance can
be given that debt or equity financing , if and when required, will be
available. The unaudited condensed consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded assets and classification of liabilities
that might be necessary if we are unable to continue in existence.

NOTE 3 - NOTES PAYABLE
At December 31, 2003 and March 31, 2004, there is a note payable to an
individual in the amount of $25,000. This note bears interest of 7% and
is past due. There is also a note payable for equipment in the amount
of $19,877 and $18,989 as of December 31, 2003 and March 31, 2004,
respectively. This note bears interest of 5.16% and matures in
September of 2008. Interest expense for the year ended December 31,
2003 and the quarter ended March 31, 2004 was $5,763 and $505,
respectively.

F-5

NOTE 4 - STOCK TRANSACTIONS

In the quarter ended March 31, 2004, 181,000 shares shown at December
31, 2003 as "stock not issued but owed to buyers" were issued.

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 future 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 will be recorded over the two-year period
of the agreement beginning July 31, 2003 and ending July 31, 2005.
Expense will be recorded at fair market value, using the Black-Scholes
pricing model, on an accelerated method, thereby recording a larger
portion of the costs in the earlier months of the two year period.
Consulting expense relating to this agreement was $469,638 for the
quarter ended March 31, 2004. As of March 31, 2004 approximately
790,000 of the 1,100,000 options have been earned and expensed.
Expenses to be recorded in the remaining quarters of the year ended
December 31, 2004 and 2005 are unknown at this time because they are
partly based on the market price over those periods.

In November 2003, an agreement was signed with William Fischbach for
consulting services to be performed November 10, 2003 to November 10,
2006. As compensation for consulting services we agreed to issue
400,000 shares of common stock. 400,000 shares of common stock were
issued on November 11, 2003. Using the market value of the date the
agreement was signed, the shares were valued at $780,000 and recorded
as a debit in the equity section of the balance sheet as unamortized
cost of stock issued for services. The cost is amortized over the
three-year period of the agreement. Consulting expense relating to this
agreement was $65,000 for the quarter ended March 31, 2004. On March
31, 2004 there was $678,671 remaining in unamortized stock issued for
services for this agreement. The agreement also calls for the issuance
of options, not to exceed an aggregate of 800,000, to Mr. Fischbach on
January 1 or each year based on the previous year's performance levels.
No options were issued on January 1, 2004 under this agreement. As of
March 31, 2004, Mr. Fischbach had earned no options based on his
performance in the quarter ended March 31, 2004. 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 March 31, 2004, Mr. Fischbach had earned no
cash fee based on the value provided to us in the quarter ended March
31, 2004.

In the quarter ended March 31, 2004, 185,200 Class A warrants were
exercised for 185,200 shares of common stock for a total of $92,600. As
of March 31, 2004, 18,000 shares had not been issued and are thereby

F-6

shown in these financial statements as stock not issued but owed to
buyers. 565,200 Class A warrants are outstanding as of March 31, 2004.
The expiration date of the Class A warrants has been extended to August
5, 2004.

In the quarter ended March 31, 2004, 6,000 Class B warrants were
exercised for 6,000 shares of common stock for a total of $18,000.
3,977,400 Class B warrants are outstanding as of March 31, 2004. The
expiration date of the Class B warrants has been extended to August 5,
2004.

In the quarter ended March 31, 2004, we commenced an offering of Series
B preferred stock and sold 143,500 shares of preferred stock, series B,
for $2,561,250, net of expenses. This preferred stock contained a
beneficial conversion feature. The feature allows the holder to convert
the preferred to 10 shares of common stock six months after buying the
shares. Attached to each preferred share is ten Class C warrants. Each
Class C warrant has a term of three years and provides the right to
purchase one share of our common stock at $7.00 per share. If the
average closing market price for our common stock is equal to or
greater than $10.50 for a period of 30 days, then such warrants are
capable of being repurchased with a 30-day notice, at a price of $.001
per warrant. A discount on preferred shares of $1,342,500 relating to
the beneficial conversion feature was recorded and will be amortized
over the six month period beginning with the date the shareholders
purchased their shares.

In the quarter ended March 31, 2004, $971,477 of the unamortized
discount on preferred shares, series A and B, has been amortized to
retained earnings. At March 31, 2004, the unamortized discount on
preferred shares, series A and B, was $2,257,599.

In the quarter ended March 31, 2004, 33,940 shares of preferred stock,
series A, were converted to 339,400 shares of common stock.

In the quarter ended March 31, 2004, 70,000 options were granted for
consulting services. The options have a strike price equal to the
market price on their grant date, ranging from $2.73 to $3.10. Using
the Black-Scholes pricing model, the options were valued at $114,700
and recorded as consulting expense.

NOTE 5 - UNAMORTIZED COST OF STOCK ISSUED FOR SERVICES
During the years ended December 31, 2003 and 2002, we issued or agreed
to issue 3,215,452 shares of common stock, granted 500,000 options for
common stock, and 100,000 options for preferred stock, series A, as
part of consulting agreements. The value of stock issued and options
granted totaled $913,036 and $1,599,213 for the years ended December
31, 2003 and 2002. This cost is recorded as a debit in the equity

F-7

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 quarter ended March
31, 2004, $70,005 was amortized into consulting expense. Unamortized
cost of stock issued for services was $711,200 as of March 31, 2004.

NOTE 6 - CONSULTING, PROMOTIONAL AND INVESTOR RELATIONS SERVICES
Consulting and investor relation services expense was $1,015,943 for
the quarter ended March 31, 2004. Consulting and investor relation
expenses incurred are detailed below:

Consulting expenses relating to stock issued for consulting agreements
was $70,005 (See Note 5) in the quarter ended March 31, 2004.
Consulting expenses relating to options issued for services was
$584,338 (See Note 4) for the quarter ended March 31, 2004.

In the quarter ended March 31, 2004, we settled a lawsuit brought by a
former consultant. The former consultant returns 100,000 shares of
common stock for cancellation in exchange for $250,000 payable in March
and April of 2004. This settlement was expensed as consulting expense
in the quarter ended March 31, 2004.

Various individuals and corporations performed consulting services and
investor relation services for us during the quarter ended March 31,
2004 and were paid $111,600.

NOTE 7 - ACQUISITIONS
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,
approximately $467,000. We paid 50,000 euros, 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. $109,165 has been recorded as acquisitions expense in
the quarter ended March 31, 2004 in relation to the option price and
related legal fees for this acquisition attempt.

On March 12, 2004, we acquired Evenstar, Inc., by a merger with and
into our newly formed, wholly owned subsidiary, Evenstar Mergersub,
Inc. (Mergersub). In consideration for Evenstar, Inc., we paid $300,000
in cash and issued 300,000 shares of common stock to the stockholders
of Evenstar, Inc. Using the market value of the common stock on the day
of the acquisition and the amount of cash given, the total acquisition
price was $1,161,000. An asset was recorded on these financial
statements in the amount of $12,498 for a patent acquired in the

F-8

merger. Evenstar had no other assets or liabilities, therefore, the
remaining $1,148,502 was recorded as goodwill on these financial
statements.

On March 12, 2004 we performed an impairment test on the goodwill
recorded in the merger with Evenstar, Inc. We determined that the
goodwill was impaired and an impairment charge of $1,148,502 was
recorded. This charge is shown on the condensed consolidated statement
of operations in the general and administrative expenses.

NOTE 8 - SUBSEQUENT EVENTS
From April 1 to May 4, 2004, we sold 30,700 shares of preferred stock,
series B, for $614,000.

From April 1 to May 4, 2004, 4,000 shares of preferred stock, series A,
were converted to 40,000 shares of common stock.

In the second quarter of 2004, we intend to make a rescission offer to
all warrant holders who exercised warrants during the period from May
1, 2002 through the current period. We are doing this because the
registration statement 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 our most recent audited financial statements. The former
warrant holders will be entitled to rescind their purchases. Once made,
the rescission offer is open for 30 days. The rescission offer would
require us to purchase warrants back at their original exercise price,
$.50 for the Class A warrants and $3.00 for the Class B warrants, at
each warrant holder's option. The current market price is well above
the $.50 exercise price of the Class A warrants so no adjustment to the
financial statements for the year ended December 31, 2003 and the
quarter ended March 31, 2004 have been made for the rescission offer.
The current market price is below the $3.00 exercise price of the Class
B warrants. 22,600 Class B warrants have been exercised as of March 31,
2004, so the rescission offer would not have a material liability
effect on these financial statements. Therefore, no adjustment has been
made. If all warrant holders accepted the rescission offer, we 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 of
these financial statements.

F-9

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

STOCKHOLDERS AND DIRECTORS
SLS INTERNATIONAL, INC.

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

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SLS International, Inc. as of
December 31, 2003 and 2002 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003 in conformity
with U.S. generally accepted accounting principles.

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

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

F-10

SLS INTERNATIONAL, INC.
BALANCE SHEET

December 31, December 31,
2003 2002
------------ -----------

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

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

F-11

SLS INTERNATIONAL, INC.
STATEMENT OF OPERATIONS

Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------

Revenue $ 968,245 $ 790,582 $ 353,797

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

Gross profit 367,032 253,339 66,873

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

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

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

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

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

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

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

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

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

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

Weighted average shares outstanding 25,496,816 20,446,711 17,406,111
============ ============ ============

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

F-12

SLS INTERNATIONAL, INC.
STATEMENT OF SHAREHOLDERS' EQUITY ( DEFICIT)

Preferred Stock,
Series A Common Stock
----------------- Discount on Contributed -------------------
Shares Amount Preferred Capital Shares Amount
--------- ------ ----------- ----------- ---------- -------

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

[RESTUBBED]

Unamortized
cost of stock
Amount Contributed issued Retained
Unissued Capital for services Deficit Total
-------- ---------- ----------- ------------ -----------

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

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

F-13

SLS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS

Year Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------

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

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

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

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

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

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

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

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

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

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

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

F-14

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

1. SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Maintenance and repairs are charged to expense as incurred.

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

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

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

F-15

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and notes. Actual results could differ
from those estimates, but management does not believe such
differences will materially affect the Company's financial
position, results of operations, or cash flows.

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

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

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

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

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

F-16

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

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

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

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

F-17

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

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

F-18

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

F-19

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

3. LONG TERM DEBT AND NOTES PAYABLE
Long term debt and notes payable consists of the following at December
31, 2003 and 2002:

December 31,
2003 2002
-------- --------

Note payable to individual, interest rate of 10% uncollateralized,
principal payable on demand. Interest paid monthly $ -- $ 50,000

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

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

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

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

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

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

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

F-20

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

Deferred tax is comprised of the following:

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

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

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

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

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

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

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

F-21

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

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

8. STOCKHOLDERS' EQUITY

Year ended December 31, 2001:

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

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

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

F-22

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

Year ended December 31, 2002:

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

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

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

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

F-23

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

F-24

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

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

F-25

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

F-26

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

F-27

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

Year ended December 31, 2003:

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

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

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

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

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

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

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

F-28

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

F-29

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

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

F-30

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

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

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

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

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

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

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

F-31

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

11. STOCK OPTION PLAN
On July 1, 2000, the Board of Directors approved a stock option plan.
The plan covers all eligible employees and is an incentive stock option
plan. The number of shares that can be issued under the plan total
2,000,000. There were no options issued in 2001. In 2002, the Company
granted 500,000 options for common stock as part of consulting
agreements detailed in Note 8. In 2003, the Company issued 1,100,000
options for common stock as part of consulting agreements detailed in
Note 8. The Company accounts for these grants under Accounting
Principles Board Opinion No. 25 under which expense has been recognized
for services. There were no options granted in the year ended December
31, 2001. The following table summarizes the options granted:

2002 2003
-------------- -----------

Dividend Yield 0% 0%
Weighted Average Expected Stock Volatility 29% 146.60%
Weighted Average Risk Free Interest Rate 2.70% 3.46%
Expected Option Lives 6 months to 10 5 years
years
Value of Options Granted $426,164 $1,142,432*

*Only options earned in 2003 are valued here. Options to be earned in
2004 and 2005 have not been valued as they will be valued on the date
they are earned. See Note 8.

Weighted Weighted
Options 2003 Average 2002 Average
------- --------- -------- ------- --------

Outstanding at beginning of year 500,000 $0.30 -- --

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

Exercised 260,000 0.25 -- --

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

Outstanding at end of year 1,340,000 $0.27 500,000 $0.30
========= ===== ======= =====

F-32

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

The following table summarizes the options granted:

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

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

Granted 145,000 $0.25

Exercised -- --

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

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

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

F-33

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

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

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

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

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

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

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

F-34

SLS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS.

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

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

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

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

F-35

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Reference is made to Section 145 of the Delaware General Corporation
law which provides for indemnification of directors and officers of a
corporation and other specified persons, subject to the specific requirements
therein contained. In general, these sections provide that persons who are
officers or directors of the corporation may be indemnified by the corporation
for acts performed in their capacities as such.

Further reference is made to sections 102 and 145 of the Delaware
General Corporation Law which provide for elimination of directors liability in
certain instances, and indemnification of directors and officers of a
corporation and other specified persons, subject to the specific requirements
therein contained. In general, section 102 allows an authorizing provision in
the Certificate of Incorporation which would, subject to certain limitations,
eliminate or limit a directors liability for monetary damages for breaches of
his or her fiduciary duty. However, such an enabling provision could not limit
or eliminate a directors liability for (a) breaches of the duty of loyalty to
the corporation or its stockholders; (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (c) the payment
of unlawful dividends or unlawful stock repurchases or redemptions; or (d)
transactions in which the director received an improper personal benefit. There
is currently such an enabling provision in the company's Certificate of
Incorporation.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, unless in the opinion of its counsel that the matter has been
settled by controlling precedent, the company will submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses (other than the
underwriting discounts and commissions and the Underwriter's Non-Accountable
Expense Allowance) expected to be incurred in connection with the issuance and
distribution of the securities being registered.

II-1

SEC Registration $ 141.49
Legal Fees and $ 15,000.00
Expenses*
Accounting Fees* $ 3,000.00
Miscellaneous* $ 2,000.00
-------------
Total. $ 20,141.49
=============
------------
* Estimated

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

2003

In 2003, the Company sold 1,370,300 shares of preferred stock for
$3,425,750 in cash. All sales were made to accredited investors. Each share of
preferred stock is convertible into ten shares of common stock after one year.
The sales were made in reliance on Section 4(2) of the Securities Act of 1933,
as amended.

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

The net proceeds from these sales and issuances in 2003 were used for
working capital purposes. We used one registered broker-dealer for the sale of
approximately 265,968 shares of preferred stock and paid commissions of $33,246
for such sales. All of the foregoing uses of proceeds were direct or indirect
payments to nonaffiliates.

2002

In 2002, we sold 315,000 shares of our preferred stock to accredited
investors, most of which were existing stockholders, for aggregate proceeds of
$787,500. We did not use an underwriter in connection with these sales. The
sales were exempt from registration under Section 4(2) of the Securities Act of
1933, as amended. The net proceeds from these sales in 2002 were used for
working capital purposes. We did not use any registered securities
broker-dealers in connection with any sales of stock. All of the foregoing uses
of proceeds were direct or indirect payments to nonaffiliates.

2001

In 2001, we sold 102,000 shares of our preferred stock to accredited
investors, most of which were existing stockholders, for aggregate proceeds of
$255,000. We did not use an underwriter in connection with these sales. The
sales were exempt from registration under Section 4(2) of the Securities Act of
1933, as amended.

II-2

ITEM 27. EXHIBITS

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

EXHIBIT WHERE LOCATED
---------------------------------------------------------------- -------------------------------------------------

Plan of Reorganization Exhibit 2 to Registration Statement on Form
SB-2 filed August 15, 2000

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

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

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

Amendment to By-laws (Article VIII) Exhibit 3.4 to Annual Report on Form 10-KSB
filed March 30, 2004
Specimen Certificate of Common Stock Exhibit 4(i) to Amendment No. 1 to Registration
Statement on Form SB-2 filed December 1, 2000

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

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

Consent and Opinion of Alfred V. Greco, PLLC Exhibit 5(i) to Amendment No. 1 to Form SB-2
filed December 1, 2001.

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

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

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

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

II-3

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

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

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

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

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

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

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

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

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

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

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

II-4

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

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

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

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

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

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

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

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

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

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

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

II-5

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

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

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

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

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

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

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

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

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

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

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

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

II-6

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

Consulting Services Agreement, dated October 28, 2003, between Exhibit 10.41 to Annual Report on Form 10-KSB
SLS International, Inc. and Zane Sellis filed March 30, 2004

Consulting Services Agreement, dated November 6, 2003, between Exhibit 10.42 to Annual Report on Form 10-KSB
SLS International, Inc. and George Iordanou filed March 30, 2004

Consulting Services Agreement, dated November 10, 2003, Exhibit 10.43 to Annual Report on Form 10-KSB
between SLS International, Inc. and William F. Fischbach filed March 30, 2004

Consulting Services Agreement, dated November 20, 2003, Exhibit 10.44 to Annual Report on Form 10-KSB
between SLS International, Inc. and Edward Decker filed March 30, 2004

Consulting Services Agreement, dated November 20, 2003, Exhibit 10.45 to Annual Report on Form 10-KSB
between SLS International, Inc. and Christopher Obssuth filed March 30, 2004

Stipulation for Entry of Judgment and Mutual General Release Exhibit 10.46 to Annual Report on Form 10-KSB
filed March 30, 2004

Stock Option Agreement, dated February 9, 2004, between SLS Exhibit 10.1 to Quarterly Report on Form 10-QSB
International, Inc., and Ryan Schinman filed May 17, 2004

Letter Agreement, dated May 19, 2004, between SLS Exhibit 10.2 to Quarterly Report on Form 10-QSB
International, Inc., and Kenny Securities Corp. filed May 17, 2004

List of Subsidiaries of SLS International, Inc. Exhibit 21 to Form 10-KSB for year ended
December 31, 2003, filed March 30, 2004

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

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

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

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

II-7

ITEM 28. UNDERTAKINGS

The undersigned hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and

(iii) To include any additional or changed material information on
the plan of distribution.

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

II-8

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned in
Springfield, Missouri, on June 28, 2004.

SLS INTERNATIONAL, INC.

/s/ JOHN M. GOTT
-----------------------
John M. Gott, President

In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:

NAME TITLE DATE
------------------------------------- ---------------------------------------------- ---------------------------

/s/ JOHN M. GOTT President, Chief Executive Officer, June 28, 2004
------------------------------------ Chief Financial Officer, Director
John M. Gott

/s/ ROBERT H. LUKE, Ph.D Director June 28, 2004
------------------------------------
Robert H. Luke, Ph.D

/s/ MICHAEL L. MAPLES Director June 28, 2004
------------------------------------
Michael L. Maples

/s/ ED MOIST Controller June 28, 2004
------------------------------------
Ed Moist

II-9