Edgar Filing: SLS INTERNATIONAL INC

As filed with the Securities and Exchange Commission on February __, 2004
Registration No. 333-43770
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

POST-EFFECTIVE
AMENDMENT NO. 2
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 (I.R.S. Employer
Incorporation or Organization) Industrial Classification Identification Number)
Code Number)

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)

JEFFRY M. MATTSON, FREEBORN & PETERS, 311 SOUTH WACKER
DRIVE, CHICAGO, IL 60606-6677 (Name, address,
and telephone number for copies of all
communications)

APPROXIMATE DATE 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 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 MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(1)
------------------------------------ -------------------- ------------------- -------------------- -----------------

Units (1) 4,000,000 $.25 $1,000,000 $264.00
------------------------------------ -------------------- ------------------- -------------------- -----------------
Common Stock, 4,000,000 (2) (2) (2)
$.001 par value
------------------------------------ -------------------- ------------------- -------------------- -----------------
Class A Warrants 4,000,000 (2) (2) (2)
------------------------------------ -------------------- ------------------- -------------------- -----------------
Class B Warrants 4,000,000 (2) (2) (2)
------------------------------------ -------------------- ------------------- -------------------- -----------------
Common Stock, 4,000,000 .50 $2,000,000 $528.00
$.001 par value(3)
------------------------------------ -------------------- ------------------- -------------------- -----------------
Common Stock 4,000,000 $3.00 $12,000,000 $3,168.00
$.001 par value(4)
------------------------------------ -------------------- ------------------- -------------------- -----------------
Total $3,960.000
===== ==========
------------------------------------ -------------------- ------------------- -------------------- -----------------

(1) Estimated solely for the purpose of calculating the registration fee.
(2) Included in the Units. No additional registration fee is required.
(3) Issuable upon exercise of the Class A Warrants.
(4) Issuable upon exercise of the Class B Warrants.

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.

4,000,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF CLASS A WARRANTS,
ISSUABLE AT $0.50 PER SHARE
(INCLUDING A RESCISSION OFFER FOR 2,386,000 OF SUCH SHARES)

4,000,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF CLASS B WARRANTS,
ISSUABLE AT $3.00 PER SHARE
(INCLUDING A RESCISSION OFFER FOR 49,800 OF SUCH SHARES)

We sold the Class A Warrants and Class B Warrants as part of a sale of
Units that was completed in May 2001. Each warrant represents a right to
purchase one share of our common stock. The Class A Warrants were originally
exercisable for six months at a price of $.50 per share. Each Class B Warrant
was originally exercisable for two years after exercise of the attached Class A
Warrant. Through a series of extensions, the Class A Warrants and Class B
Warrants are now exercisable through August 4, 2004. Unless the Class A Warrant
is exercised prior to such date, the Class B Warrant is not separable from the
Class A Warrant. Upon exercise of the Class A Warrant, the Class B Warrant will
become separable and exercisable at a price of $3.00 per share. We will receive
all proceeds from sales of the common stock upon exercise of the Class A
Warrants and Class B Warrants.

The Rescission Offer:
--------------------
We are offering to repurchase 2,435,800 shares of our common stock from
warrant holders who purchased those shares upon exercise of our Class A Warrants
and Class B Warrants between May 1, 2002 and the date of this prospectus. The
repurchase price for the shares subject to our rescission offer is $0.50 per
share for shares issued upon exercise of Class A Warrants and $3.00 per share
for shares issued upon exercise of Class B Warrants, plus any interest required
by state law. The maximum aggregate purchase price, excluding interest,
estimated to be payable if the rescission offer is accepted in full is
$1,342,400. The rescission offer expires, with respect to each warrant holder,
thirty days after such holder's receipt of the offer.

Our common stock is traded on the over-the-counter bulletin board under
the symbol SITI.OB. On January 27, 2004, the closing bid price of our common
stock on the over-the-counter bulletin board was $3.45. You should obtain
current market price quotations before deciding whether to exercise your
warrants or deciding whether to accept the rescission offer.

THE SECURITIES OFFERED BY THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING
"RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.

THE SECURITIES AND EXCHANGE COMMISSION AND STATE REGULATORY AUTHORITIES
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

The date of this prospectus is ____________, 2004

TABLE OF CONTENTS

PAGE

QUESTIONS AND ANSWERS ABOUT OUR RESCISSION OFFER...................................................................................1
PROSPECTUS SUMMARY.................................................................................................................2
RISK FACTORS.......................................................................................................................4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................7
MARKET FOR SLS SHARES.............................................................................................................12
FORWARD-LOOKING INFORMATION.......................................................................................................13
DILUTION..........................................................................................................................13
DETERMINATION OF OFFERING PRICE...................................................................................................15
USE OF PROCEEDS...................................................................................................................15
BUSINESS..........................................................................................................................16
MANAGEMENT........................................................................................................................25
PRINCIPAL STOCKHOLDERS............................................................................................................27
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS...................................................................................28
PLAN OF DISTRIBUTION..............................................................................................................28
THE RESCISSION OFFER..............................................................................................................28
DESCRIPTION OF CAPITAL STOCK......................................................................................................29
SHARES ELIGIBLE FOR FUTURE SALE...................................................................................................33
LEGAL MATTERS.....................................................................................................................33
EXPERTS...........................................................................................................................33
FURTHER INFORMATION...............................................................................................................33
INDEX TO FINANCIAL STATEMENTS....................................................................................................F-1

QUESTIONS AND ANSWERS ABOUT OUR RESCISSION OFFER

Q: WHY ARE YOU MAKING THE RESCISSION OFFER?

A. The issuance of shares in connection with the exercise of Class A
Warrants and Class B Warrants during the period from May 1, 2002
through the date of this prospectus may not have complied with the
Securities Act of 1933, as amended, because the registration statement
filed with the SEC for those stock issuances was not amended to include
our most recent audited financial statements. As a result, we are
offering for the purchasers of those shares to rescind their purchases.

Q: WHAT WILL I RECEIVE IF I ACCEPT THE RESCISSION OFFER?

A: If you accept our rescission offer, we will repurchase the shares you
received upon exercise of the warrants at the exercise price per share
you paid to us plus interest from the date of exercise. If you have
sold the shares you received upon exercises of warrants during the
period from May 1, 2002 through the date of this prospectus, we will
reimburse the amount of the loss upon such sale plus interest from the
date of sale. If the shares were sold at a gain, you would have no
damages and would therefore not be entitled to accept the rescission
offer.

Q: WHEN DOES THE RESCISSION OFFER EXPIRE?

A: Our rescission offer expires, with respect to each warrant holder,
thirty days after such holder's receipt of the offer.

Q: WHAT DO I NEED TO DO NOW TO ACCEPT THE RESCISSION OFFER?

A: You should complete, sign, and date the accompanying letter and return
it to us, together with your stock certificates for the shares you want
us to repurchase, in the enclosed return envelope prior to the
expiration date.

Q: WHAT HAPPENS IF I DON'T RETURN THE ATTACHED LETTER?

A: If you do not return the attached letter before the expiration date of
our rescission offer, you will be deemed to have rejected our offer.

Q: CAN I CHANGE MY MIND AFTER I HAVE MAILED THE ATTACHED LETTER?

A: Yes. You can change your decision about accepting or rejecting our
rescission offer at any time before the expiration date. You can do
this by completing and submitting a new letter.

Q: WHO CAN HELP ANSWER MY QUESTIONS?

A: You can call John Gott of SLS International, Inc. at 800/776-4549 with
any questions about the rescission 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, and Home
Theatre systems. Our executive offices are located at 3119 South Scenic,
Springfield, Missouri, 65807, with telephone number (417)883-4549.

THE OFFERING

We offered and, on May 2, 2001, sold 4,000,000 units, each unit
consisting of one share of common stock, one Class A Warrant and one Class B
Warrant. We are offering 8,000,000 shares of common stock for sale upon the
exercise of the outstanding Class A Warrants at a price of $0.50 per share and
upon the exercise of the outstanding Class B Warrants at a price of $3.00 per
share commencing on the date of this prospectus until August 4, 2004, unless
further extended, which date shall be the termination date of the offering.

o Class A Warrants are exercisable at $0.50.
o Class A Warrant must be exercised or the Class B Warrant
becomes void.
o Class B Warrant becomes separable from the Class A Warrant
only after Class A Warrant is exercised.
o After Class A Warrant is exercised, the Class B Warrant
becomes exercisable at a price of $3.00 per share.

(See "Description of Securities")

Our officers, directors, principal stockholders and their affiliates
holding warrants may purchase common stock in this offering on the same terms as
other investors holding Class A or Class B Warrants. Such shares will be
purchased by them for investment and not with a view to resale. There are no
limits as to the amount the officers, directors or principal stockholders may
purchase.

THE RESCISSION OFFER

Included in the shares offered hereby are 2,435,800 shares of stock for
which we are making an offer of rescission. From May 1, 2002 through the date of
this prospectus, warrant holders exercised 2,394,000 Class A Warrants and 49,800
Class B Warrants for a total of 2,443,800 shares of common stock. We confirmed
that two warrant holders sold 8,000 of the shares received upon exercise of the
Class A Warrants at a gain, and we therefore excluded those shares from the
rescission offer. The warrant holders paid an aggregate of $1,342,400 for the
exercises of the 2,435,800 Class A Warrants and 49,800 Class B Warrants. During
such period, the registration statement that we filed with the U.S. 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.

As a result, we are offering rescission of warrant exercises to all
warrant holders who exercised warrants during the period from May 1, 2002
through the date of this prospectus (excluding the 8,000 shares described

above), for a total of $1,342,400 plus any interest required by state law. Since
the closing bid price of our common stock on January 27, 2004 was $3.45, and the
rescission offer is being made at the exercise prices of $0.50 per share for
Class A Warrants and $3.00 per share for Class B Warrants, we believe that it is
unlikely that any warrant holders, and particularly the holders who exercised
Class A Warrants, will accept the rescission offer. If all holders who exercised
Class B Warrants accept the rescission offer, we will be required to pay
$149,400 plus interest for such rescissions.

USE OF PROCEEDS

Through the date of this prospectus, 3,266,000 Class A Warrants and
49,800 Class B Warrants have been exercised. If all of the remaining 734,000
Class A Warrants and 3,950,200 Class B Warrants are exercised, we will receive
gross proceeds of $12,217,600. After deducting estimated fees for legal and
accounting and miscellaneous expenses of the offering of $50,000, we will
receive net proceeds of approximately $12,167,600. The net proceeds realized
from the offering will be used for equipment; research and development; sales,
marketing and advertising; inventory; and working capital.

REGISTRAR AND TRANSFER AGENT

We have appointed Standard Registrar & Transfer of Salt Lake City,
Utah, as our transfer agent and warrant agent for the registration, issuance and
transfer of our shares of common stock issuable upon exercise the Class A and
Class B Warrants.

MARKET STATUS FOR SLS SECURITIES

Our common stock is quoted on the Nasdaq Over-The-Counter Bulletin
Board under the symbol "SITI.OB." On January 27, 2004, the last reported sale
price for our common stock as reported on the Nasdaq Over-The-Counter Bulletin
Board was $3.45 per share.

OUTSTANDING SHARES

SUMMARY CONSOLIDATED FINANCIAL DATA

BALANCE SHEET

September 30, 2003 December 31, 2002
------------------ -----------------
(unaudited)
Current Assets $ 2,789,190 $ 437,773
Net Fixed Assets $ 61,377 $ 26,224
Total Assets $ 2,850,567 $ 463,997
Current Liabilities $ 407,561 $ 1,026,259
Total Stockholders Equity / (Deficit) $ 2,443,006 $ (562,262)

STATEMENT OF OPERATIONS

Nine Months Ended Year Ended Year Ended
September 30, 2003 December 31, 2002 December 31, 2001
------------------ ----------------- -----------------
(unaudited)

Revenues $ 650,044 $ 790,582 $ 353,797
Gross Profit $ 365,682 $ 253,339 $ 66,873
Loss from Operations $(2,866,538) $(2,215,226) $(1,001,462)
Other Income (Expense) $ 99,054 $ (27,099) $ (38,712)
Loss before income tax $(2,767,484) $(2,242,325) $(1,040,174)
Benefit from income tax $ -- $ -- $ --
Net Loss $(2,767,484) $(2,242,325) $(1,040,174)

We anticipate that in the future, we will make significant investments
in marketing, product development and capital equipment.

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
prospectus, 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, 2002,
have an accumulated retained deficit of approximately $5,065,782. 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, 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 loss of profits.

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 the market for our ribbon driver loudspeaker products is
relatively new and emerging, the markets for our 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, 2002 included a statement that, because of recurring losses
and our dependency on the sale of securities or obtaining additional 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 the 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 have recently experienced 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. Some of these businesses and technologies 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. There are
presently approximately 14,365,736 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.

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

OVERVIEW

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 stockholder, 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, 2002 AND DECEMBER 31, 2001
---------------------------------------------------

RESULTS OF OPERATIONS

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.

YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE YEAR ENDED DECEMBER 31,
2000. For the year ended December 31, 2001, revenue increased to $353,797 from
$163,350 in 2000, since 2001 was our first full year of sales of several
products following a partial year in 2000, and 2001 was the initial year for
sales of other products. In addition, sales of all products have increased
steadily since their introduction. In 2001, despite the increased revenue, we
reported a net loss of $1,040,174 as compared to a net loss of $781,710 in 2000.
The greater net loss was the result of increased general and administrative
expenses and to a lesser extent increased interest expense.

General and administrative expense for the year ended December 31, 2001
increased to $1,068,335 from $813,571 in 2000, primarily as a result of a new
employee handling our development of a transducer, a new controller for our
financial operations, increased trade show participation to promote our
products, and the additional legal, accounting, consulting and other costs
incurred as a result of our 2001 public offering.

Interest expense increased to $46,011 in 2001 as compared to $27,126 in
fiscal 2000, due to increased borrowings.

FINANCIAL CONDITION

On December 31, 2002, our current liabilities exceeded current assets
by $588,486 compared to $296,734 on December 31, 2001. Total liabilities
exceeded net assets on December 31, 2002 by $562,262, as compared to $262,166 on
December 31, 2001. The increased working capital deficit was due primarily to
increases in accounts payable and other increased liabilities incurred from our
expanding operations, and decreases in cash. These factors were partially offset
by an increase in inventory and accounts receivable, funded in large part by the
sales of equity described below, as well as increases in accounts payable and
accrued liabilities. The changes in these items were the result of our net loss
from operations in 2002.

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 2002 and 2001, we entered into consulting agreements that required
us to issue an aggregate of 2,495,000 shares of common stock, options to
purchase 100,000 shares of Class A preferred stock at an exercise price of $2.50
per share (each such share of preferred stock converts into 10 shares of common
stock), and options to purchase 500,000 shares of our common stock at $0.30 per
share. Total expenses under such agreements are $1,599,213, $1,074,229 of which
is reflected as amortized expenses in 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.

We are experiencing significant cash shortages; we had $4,240 in cash
on December 31, 2002. In order to continue operations, we have been dependent on
raising additional funds and have continued to sell preferred stock in the
beginning of 2003 to raise capital. In 2002 we privately sold preferred stock

for a total of $787,500, and through March 2003 we sold an additional $82,350.
In addition, we have outstanding warrants, which, upon exercise, provided
additional funding of $50,500 in 2002.

Accounts receivable increased due to increased sales. However, the
increase would have been greater if we had not taken an allowance of $132,396.

Notes payable increased to $414,720 on December 31, 2002. One note
totaling $2,087 is secured with equipment; and most of the remaining borrowings
are from individuals, are unsecured and matured in the first quarter of 2002.
However, these notes are payable to existing shareholders that are not making a
demand on the notes and will continue to accrue interest at 7% (10% in the case
of a note with a principal amount of $50,000) for an indefinite period of time.
We expect that these shareholders will continue to permit these notes to remain
outstanding, but they have the right to demand full payment at any time and they
may do so, which would have a material adverse effect on our financial
condition.

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 common 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.

QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------

RESULTS OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 2003 AS COMPARED TO THE QUARTER ENDED
SEPTEMBER 30, 2002. For the quarter ended September 30, 2003, revenue increased
to $268,023 from $161,688 in 2002, a 66% increase, resulting primarily from the
expansion of our loudspeaker product line and the continued growth in sales of
our loudspeakers. Our gross profit percentage increased to approximately 52% in
the 2003 period from approximately 23% in the 2002 period, primarily as a result
of continued improvement in efficiency as we increase revenue and increased
sales of our higher-margin models.

General and administrative expenses for the 2003 third quarter
increased to $2,123,685 from $605,885 in the 2002 third quarter, an increase of
$1,517,800. The increase resulted primarily from an aggregate of $810,730 in
cash fees paid to consultants for services including investor relations,
corporate awareness and offering fees, a non-cash charge of $529,605 in the 2003
third quarter related to the issuance of options pursuant to an endorsement
agreement (compared to $0 in the 2002 third quarter), and a $200,000 non-cash
charge related to the exercise of warrants by a consultant without payment of
the exercise price, which was provided as compensation to such consultant. These
increases were partially offset by a reduction in the non-cash cost amortized in
the 2003 quarter, compared to the 2002 quarter, reflecting a portion of the fair
value of stock issued under consulting agreements entered into during the
quarter and in prior periods.

Due to the increase in general and administrative expenses, partially
offset by the revenue increase and the improvement in gross profits, our net
loss increased to $1,911,769 in the third quarter of 2003 as compared to a net
loss of $572,957 in the comparable quarter of 2002.

Other income (expense) decreased to a net other income of $72,694 in
the 2003 third quarter as compared to net other expense of $4,808 in the 2002
third quarter, primarily due to interest on cash retained upon completion of our
preferred stock private placement in July 2003 and miscellaneous income related
to the collection of accounts receivable that had been written off in prior
periods.

NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2002. For the first nine months of 2003, revenue increased
to $650,044 from $486,204 in 2002, a 34% increase, resulting primarily from the
expansion of our loudspeaker product line and the continued growth in sales of
our loudspeakers. Our gross profit percentage increased to approximately 56% in
the 2003 period from approximately 34% in the 2002 period, primarily as a result
of continued improvement in efficiency as we increase revenue and increased
sales of our higher-margin models.

General and administrative expenses for the nine months ended September
30, 2003 increased to $3,232,220 from $1,667,850 in the 2002 period, an increase
of $1,564,370. The increase resulted primarily from an aggregate of $830,730 in
cash fees paid to consultants for services including investor relations,
corporate awareness and offering fees, a non-cash charge of $529,605 in the 2003
period related to the issuance of options pursuant to an endorsement agreement
(compared to $0 in the 2002 period), and a $200,000 non-cash charge related to
the exercise of warrants by a consultant without payment of the exercise price,
which was provided as compensation to such consultant. These increases were
partially offset by a reduction in the non-cash cost amortized in the 2003
period, compared to the 2002 portion, reflecting a portion of the fair value of
stock issued under consulting agreements entered into during the quarter and in
prior periods.

Due to the increase in general and administrative expenses, partially
offset by the revenue increase and the improvement in gross profits, our net
loss increased to $2,767,484 in the first nine months of 2003 as compared to a
net loss of $1,518,309 in the 2002 period.

Other income (expense) increased to net other income $99,054 in the
2003 period as compared to a net other expense of $18,032 in the 2002 period,
primarily due to interest on cash retained upon completion of our preferred
stock private placement in July 2003 and miscellaneous income related to the
collection of accounts receivable that had been written off in prior periods.

FINANCIAL CONDITION

On September 30, 2003, our current assets exceeded current liabilities
by $2,381,629, compared to an excess of current liabilities over current assets
of $588,486, on December 31, 2002. Total assets exceeded total liabilities by
$2,443,006, compared to an excess of total liabilities over total assets of
$562,262 on December 31, 2002. The increased working capital was primarily due
to the sale of 1,452,300 shares of preferred stock for $3,630,750 in the first
nine months of 2003. In addition to funding operations, the proceeds from such
sales of stock allowed us to increase cash by $2,044,041, increase inventory by
$337,713, decrease long-term debt and notes payable by $389,720, decrease
accounts payable by $63,340, decrease amounts due to shareholders by $20,519,
and decrease accrued liabilities by $145,119. On September 30, 2003, we had a
backlog of orders of approximately $90,000.

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. In addition we have not paid notes payable and accounts
payable on due dates. However, many of the past-due amounts have now been paid
with the proceeds from sales of our preferred stock in the first nine months of
2003. 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 we continued to sell preferred stock through July 31, 2003
to raise capital. In the third quarter of 2003 we sold 1,303,660 shares of
preferred stock for $3,259,150 in cash. These sales completed our preferred
stock private placement that commenced in September 2001 and substantially
alleviated our cash shortages in the near-term. In the nine months ended
September 30, 2003, we also received an aggregate of $810,000 in cash in payment
of the exercise price for the exercise of outstanding warrants.

Long-term debt and notes payable decreased to $25,000 on September 30,
2003, as we repaid all such debt and notes, except for one note. The remaining
note is from one individual, is unsecured and matured in the third quarter of
2001. However, the note is payable to an existing shareholder that is not making
a demand on the note and will continue to accrue interest at 7% for an
indefinite period of time. We expect that the shareholder will continue to
permit the note to remain outstanding, but the shareholder has the right to
demand full payment at any time and may do so.

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.

In July 2003, we agreed to lease an additional 7,500 square feet of
space for $2,000 per month. We are planning the build-out of this space, which
we intend to use as (a) storage space for additional inventory of 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 this additional space, together with our
existing space, will be sufficient to meet our needs for projected sales levels
for the next two to three years.

Effective as of May 2003, we orally agreed upon an endorsement
arrangement with Gordon Sumner, p/k/a Sting, one of the world's most popular
music entertainers. Our agreements with his companies, Steerpike Inc. and
Steerpike (Overseas) Ltd., signed in July 2003, provide that Sting will endorse
our products for a period of two years. The endorsement includes our use of his
photographs with our products, as well as his comments about our products. Our
products will be installed in his home and may be used in his upcoming world
tour. For the endorsement, we issued options to purchase 1,000,000 shares of our
common stock at $0.25 per share, the market value of our common stock when the
agreement was verbally made.

MARKET FOR SLS 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 January 27, 2004, the last reported sale price for our
common stock as reported on the Nasdaq Over-The-Counter Bulletin Board was $3.45
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 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 December 31, 2003 there were approximately 111 holders of record of
our common stock. 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.

FORWARD-LOOKING INFORMATION

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.

DILUTION

Net tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the total number of shares of

common stock outstanding. SLS's net tangible book value at September 30, 2003
was $2,443,006 or $.09 per share of common stock. Dilution per share represents
the difference between:

(a) each of (1) the exercise price of $0.50 per share payable by
investors upon exercise of a Class A Warrant and (2) the exercise price of $3.00
per share payable by investors upon exercise of a Class A Warrant; and

(b) the net tangible book value per share of common stock, as adjusted,
immediately after this offering.

Through January 27, 2004, 3,266,000 Class A Warrants and 49,800 Class B
Warrants had been exercised for gross proceeds of $1,782,400. Assuming exercise
of the remaining 734,000 Class A Warrants and 3,950,200 Class B Warrants and
after deduction of offering expenses estimated to be $50,000, our pro forma net
tangible book value will be $14,941,206, or $0.46 per share, based on our
September 30, 2003 unaudited balance sheet. This represents an immediate
increase in pro forma net tangible book value of $0.37 per share for existing
stockholders compared to an immediate dilution of $0.04 per share, or
approximately 8% of the exercise price, to investors exercising Class A Warrants
in the offering and an immediate dilution of $2.54 per share, or approximately
85% of the exercise price, to investors exercising Class B Warrants in the
offering.

Exercise Price per share (Class A Warrants) $ 0.50
Exercise Price per share (Class B Warrants) $ 3.00
Net Tangible Book Value per share before Offering $ 0.09
Increase Per Share attributable to sale of shares hereby $ 0.37
Pro-Forma Net Tangible Book Value after Offering $ 0.47
Dilution per share to Investors exercising Class A Warrants $ 0.04
Dilution per share to Investors exercising Class B Warrants $ 2.54

The following table summarizes and compares as of December 31, 2003,
(a) the number of shares purchased by investors and present stockholders
represented as a percentage of SLS's total outstanding shares, (b) the aggregate
amount paid for the shares by investors as compared to the price paid by
existing stockholders, (c) the aggregate amount paid figured as a percentage of
the total amount paid by investors and by existing stockholders, and (d) the
average amount paid per share for such shares by public investors and existing
stockholders. For purposes of this table, the sale to the public of the shares
offered by this prospectus, is assumed to have taken place on December 31, 2003.

PERCENT OF TOTAL PAID AS AVERAGE
COMPANY'S PERCENTAGE OF AMOUNT
SHARES TOTAL TOTAL AMOUNT TOTAL AMOUNT PAID PER
PURCHASED SHARES PAID RECEIVED SHARE
--------- ------ ---- -------- -----
PRESENT

STOCKHOLDERS 28,616,128 85.9% $ 6,438,365 34% $0.22

CLASS A 734,000 2.2% $ 367,000 2% $0.50
WARRANT HOLDERS

CLASS B WARRANT HOLDERS 3,950,200 11.9% $11,850,600 64% $3.00

As demonstrated by the above tables, the exercise price of the warrants
is substantially higher then the net tangible book value per share of the
outstanding common stock immediately after the offering. As a result, purchasers
of shares will experience immediate and substantial dilution of their investment
in the amount of approximately $0.04 per share in net tangible book value per
share purchased upon exercise of the Class A Warrants, or approximately 8% of
the exercise price of $0.50 per share, and approximately $2.54 per share in net

tangible book value per share purchased upon exercise of the Class B Warrants,
or approximately 85% of the exercise price of $3.00 per share. In contrast,
existing stockholders paid an average price of $0.22 per share.

Future sales of our common stock by our present stockholders may
depress SLS's stock price and investors may not be able to resell their shares
at a profit.

We had 28,616,128 shares of common stock outstanding on January 27,
2004 which includes 3,315,800 shares issued following the exercise of Class A
and Class B Warrants. 734,000 Class A Warrants and 3,950,200 Class B Warrants
were outstanding on January 27, 2004. Assuming exercise of all such Class A and
Class B Warrants, we would have 33,300,328 shares of common stock outstanding,
based upon the number outstanding on January 27, 2004. All of the 8,000,000
shares of common stock sold in this offering can be freely traded. A total of
21,040,328 shares of stock of our present stockholders have not been registered
with the SEC, however, and certain amounts of these shares of unregistered
common stock are currently or will become available for public sale in the
market pursuant to Rule 144 under the Securities Act of 1933. After the existing
owners of the unregistered shares have owned them for at least one year, they
may sell such remaining shares. Their sales of a substantial number of shares of
common stock in the public market after this offering or after the expiration of
the one-year holding periods could cause the market price of our common stock to
decline.

DETERMINATION OF OFFERING PRICE

Prior to the May 2001 offering of the Units that included the Class A
and Class B Warrants, there was no public market for the shares of our common
stock. The exercise prices per share for the shares of common stock issuable
upon exercise of the Class A and Class B Warrants was determined by our
officers. Among the factors considered in determining the exercise prices per
share were our record of operations, our financial position and prospects, and
our revenues, as well as the price-earnings ratios, price-sales ratios, market
prices of securities, and financial and operating information of publicly traded
companies similar to SLS.

USE OF PROCEEDS

The total gross proceeds to be received by SLS from the exercise of all
of the remaining 734,000 Class A Warrants and 3,950,200 Class B Warrants would
be $12,217,600; provided that warrant holders may not exercise all such warrants
and as a result we may not receive such total gross proceeds. After deducting
estimated legal, accounting and miscellaneous expenses of approximately $50,000,
the offering shall produce estimated net proceeds of $12,167,600. That amount
was arrived at after making estimated deductions of $10,000 for accounting,
$30,000 for legal fees, $5,000 for printing, and $5,000 for miscellaneous
expenses.

The net proceeds of the offering are estimated to be utilized as
follows:

Amount % of Net Proceeds
------ -----------------

Equipment $ 100,000 0.8%
Sales, Marketing & Advertising $ 2,000,000 16.4%
R & D $ 200,000 1.6%
Inventory $ 5,000,000 41.1%
Working Capital $ 4,867,600 40.0%
------

Total Net Proceeds $12,167,600 100.00%
=========== ======

The equipment to be purchased consists of product test equipment,
engineering test equipment, and equipment providing partial automation of our
cabinet manufacturing. Of the proposed expenditure for sales, marketing and
advertising, $1,000,000 will be for advertising, $500,000 used for trade shows
and $500,000 marketing events and product demonstrations. Research and
development expenses will be incurred for new product designs, and the inventory
expenses will greatly increase the volume of our products in our inventory, in
each case in anticipation of demand by mass merchandisers. Working capital of
$4,867,600 will be used for salaries, general and administrative costs and
day-to-day operations.

The amounts set forth above are estimates developed by management of
SLS for allocation of the net proceeds of this offering based upon our current
plans. Although we do not currently expect to make material changes in the
proposed use of proceeds, to the extent that management finds that changes are
required, the amounts shown may be changed among the uses indicated above. SLS's
proposed use of proceeds may be altered due to changes in general, economic and
competitive conditions, timing and management discretion, each of which may
cause a change in the amount of proceeds expended for the purposes specified.
The proposed application of proceeds may also be altered due to changes in
market conditions and SLS's financial condition in general. These changes may
include the occurrence of a national economic slowdown or recession, a
significant change in the industry and the environment in which SLS operates,
and/or regulatory or governmental changes in general.

BUSINESS

BACKGROUND

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.

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 stockholder, and SLS International, Inc. was the
surviving corporation. All of the financial and other 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.

In July 2000, our Board of Directors declared a 12,800 to one, forward
stock split. As a result, for each outstanding share of SLS, we issued an
additional 12,800 shares. The resulting total of outstanding shares of SLS, as
reorganized, became 14,340,480 shares of common stock. All references to shares
in this prospectus, whether prior to or after the reorganization, are references
to the outstanding shares of SLS, as it has been reorganized.

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 made the high frequency or treble sounds and the woofers
made 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.

In the latter part of 1998, we determined to focus our efforts solely
on the manufacture and sale of lines of ribbon driver speaker systems. Our
speaker systems product lines consist of:

o The Professional Contractor Speaker System, a more expensive
"professional" line;
o The Universal Soldier Speaker System, a less expensive
"commercial" line; and
o The Home Theatre Speaker System.

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 and price 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 persons 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. We have recently started to directly manufacture
models PRD 500 and PRD 1000, for use in our Home Theatre line, Universal Soldier
Commercial line 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. 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.

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 have added two new
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 presently consists of
eighteen models of speaker systems, each model consisting of a speaker cabinet
and components of woofers which provide the bass sounds and ribbon drivers which
provide the treble sound. 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 Soldier Speaker System, consists of
lower-cost speakers which 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 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 an appropriate
market 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
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.

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.

FUTURE PRODUCTS

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 are being repackaged for this line. We are
conducting tests on the repackaged models and plan to introduce them in Fall
2003.

We have developed a new less-expensive 5.1 Home Theater system, which
is nearly ready for production. All research and development has been completed,
and we are waiting for the delivery schedule from our vendors for the cabinets
and other parts that we do not manufacture.

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 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. We are no longer engaged in the installation of speaker
systems but are solely involved with the design, manufacture and distributor
sale of our loudspeaker product lines. In addition to advertising in trade
journals and attending industry conventions for promotion and sale of our
products, we are in the process of establishing 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. Our agreement with our dealers
requires them to use their best efforts to promote and advertise our products,

maintain a minimum inventory of loudspeaker systems and produce a minimum of
annual sales. The agreement requires that we are to design products with the
highest-quality standards and provide suggested user prices to dealers. 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 Soldier Loudspeaker systems and Home Theatre
speaker systems. In 2002, we sold 300 units of the Universal Soldier systems, a
total of 325 units of the Home Theatre Systems, and 400 units of our
Professional Contractor 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
Soldier and Home Theatre lines that we manufacture contain our new technology
ribbon driver model PRD 500. The Professional Contractor Loudspeaker product
line contains our new technology 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 which 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 lower priced, less sophisticated line of loudspeaker systems,
similar to our Universal Soldier 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 which
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 11 employees, one of which is executive, two are
administrative, one is a marketing director, and seven are technical. In the
past, we have employed 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 the future periods are subject to
all of the risks and uncertainties which are inherent in the establishment of
new business enterprises. Our future operating results 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 new, less costly, ribbon driver manufactured by us, beginning in 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, you
should not rely on period-to-period comparisons of our financial results to
forecast 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 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 are planning the build-out of this space, which
we intend to use for additional inventory space for the components and cabinets
needed for (a) 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 this additional space, together with our
existing space, 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.

RECENT EVENTS

In February 2004, we entered into an agreement with Evenstar, Inc. to acquire
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 would propose to use in our loudspeakers and
in stereo amplifiers in a product line complementary to our loudspeakers. The
products would be sold 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 would pay $300,000 in
cash and issue 300,000 shares of our common stock to the seller. Simultaneous
with the acquisition, we would hire Joel Butler as director of our electronics
division at an annual salary of $90,000 plus annual option grants based on the
amount of gross profits received from sales of products containing the
technologies acquired from Evenstar. We expect the acquisition to close in
February 2004, although we have the right not to close the acquisition for any
reason in which case we would forfeit no greater than $60,000 in deposits.

In February 2004, we entered into an agreement with the owners of SA Sound B.V.
and SA USA, Inc., giving us an option to acquire such companies at any time
prior to February 27, 2004 for a purchase price of 370,000 euros. SA Sound B.V.
manufactures and distributes audio products worldwide, and SA USA, Inc.
distributes these products in the U.S. If we elect to exercise the option, we
would use the manufacturing and distribution capabilities of the companies to
decrease our costs of marketing to the European and Far East markets. We paid
50,000 euros for this option. Prior to exercising the option, we will perform
further due diligence on the companies and negotiate a stock purchase agreement
with the sellers. If the sellers fail to negotiate such stock purchase agreement
in good faith, or if the due diligence discloses material adverse facts about
the companies, we are entitled to a return of the option purchase price.

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 52 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. Mr. Gott acted as its President and
CEO since inception. In that capacity he spearheaded its 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.

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.

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 directors, officers or persons controlling SLS pursuant
to the provisions in the SLS' 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:

OTHER ANNUAL
NAME & PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(A)
------------------------------------------- ---------- ---------------- ----------- ---------------------------

John M. Gott 2002 $50,440 0 $3,898
President 2001 $50,440 0 $2,614

Richard L. Norton(b) 2002 $35,384 0 $2,487
Vice President 2001 $40,000 0 $6,547

------------
(a) All amounts are payments of medical insurance.
(b) Resigned on November 18, 2002.

Each executive officer also serves as a director but receives no
compensation for acting as a director. We intend to pay future outside directors
who are not officers reasonable and customary fees for their services as
directors and for attendance, in person or by telephone, at each meeting of the
Board of Directors. We presently have no audit, compensation or nominating
committee.

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:

NAME & ADDRESS SHARES PERCENT(1)
--------------------------------------------------------------------------- ----------------------- --------------

John M. Gott 10,238,045(2) 35.7%
1020 S. Pickwick
Springfield, MO 65804

Robert H. Luke 16,500(3) *
818 N. Forest
Springfield, MO 65802

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) 10,264,545 35.9%

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 January 27, 2004 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 September 30, 2003,
we owed $2,674 to Mr. Gott and $0 to Mr. Norton.

PLAN OF DISTRIBUTION

Upon effectiveness of this prospectus, SLS will offer the common stock
to its warrant holders that exercise their warrant shares through Mr. Gott. Each
common share is offered on a direct offering basis.

No officers or directors will receive any commissions or compensation
for their sale of the common stock pursuant to the terms of the offering. SLS
does not anticipate using any registered securities broker-dealers in connection
with any sales of the common stock. Officers, directors and other principal
stockholders and their affiliates are permitted to purchase the common stock
offered if they hold Class A or Class B Warrants. If they choose to purchase in
the offering through the exercise of their warrants, they will purchase on the
same terms as other non-affiliated investors. However, any officer, director or
affiliate purchasing in the offering will purchase for investment and not with a
view to resale of the shares of common stock.

RESCISSION OFFER

From May 1, 2002 through the date of this prospectus, warrant holders
exercised 2,394,000 Class A Warrants and 49,800 Class B Warrants for a total of
2,443,800 shares of common stock. The warrant holders paid an aggregate of
$1,346,400 for these exercises.

We had a registration statement on file with the SEC registering the
shares of common stock that the former warrant holders received upon exercise of
the warrants. Under SEC rules, for the registration to be effective, the
registration statement must be "current" at the time the shares of common stock
are issued. In the case of the shares issued upon exercise of the warrants, this
means that the registration statement must be current at the time the applicable
warrant is exercised. To be current, SEC rules require the registration

statement to be amended within 120 days following the end of the issuer's fiscal
year, in order to include the audited financial statements for such fiscal year.
We recently determined that the registration statement covering the shares
issued upon exercise of the warrants may not have been current on and after May
1, 2002, because it was not amended to include our most recent audited financial
statements.

As a result, we are offering rescission to all warrant holders who
exercised warrants during the period from May 1, 2002 through the date of this
prospectus (excluding 8,000 shares of common stock received upon exercise of
Class A Warrants, which were sold at a gain), at the option of the warrant
holders. If a warrant holder elects to accept the offer of rescission, we will
return the exercise price of $0.50 per share of common stock received upon
exercise of Class A Warrants, and we will return the exercise price of $3.00 per
share of common stock received upon exercise of Class B Warrants, in each case
plus any interest required by the law of the state of the warrant holder's
residence.

If a warrant holder already sold the shares of common stock in an
arm's-length transaction, we will reimburse the amount of the loss upon such
sale plus any interest required by the law of the warrant holder's state of
residence. If the shares were sold at a gain, the warrant holder would have no
damages and would therefore not be entitled to accept the rescission offer.

The rescission offer expires, with respect to each warrant holder,
thirty days after such holder's receipt of the offer.

Since we are unable to determine which warrant holders have sold their
shares and the prices of any such sales, we are unable to determine our total
potential liability from the rescission offer. However, in the unlikely event
that none of the former warrant holders have sold the shares of common stock
eligible for rescission, and if all eligible warrant holders elect to rescind
their exercises of warrants, we would be obligated to pay a total of $1,342,400
plus interest. This amount would be reduced to the extent any common stock has
been sold by the eligible warrant holders, in the amount of the proceeds from
such sales. Since the closing bid price of our common stock on January 27, 2004
was $3.45, and the rescission offer is being made at the exercise prices of
$0.50 per share for Class A Warrants and $3.00 per share for Class B Warrants,
we believe that it is unlikely that any warrant holders, and particularly the
holders who exercised Class A Warrants, will accept the rescission offer. If all
holders who exercised Class B Warrants accept the rescission offer, we could be
required to pay up to a maximum of $149,400 plus interest for such rescissions.
On September 30, 2003, SLS had current assets of $2,789,190, which will be
sufficient to fund any accepted offers of rescission.

For warrant holders in the State of Michigan, the offer is being made
pursuant to Section 451.810(e) of Michigan Compiled Laws, 1979, as amended. A
copy of such section is available by calling John Gott, the Company's President,
at (800) 776-4549. Total

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 January 27, 2004, there were outstanding a
total of 28,616,128 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. Upon completion
of this offering, Mr. Gott will own 42% 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.

We are currently considering a private offering of additional preferred
stock. Pursuant to such offering, as presently contemplated, we would designate
1,000,000 shares as Series B Preferred Stock. Such shares, after six months from
the date of purchase, would be convertible into ten shares of our common stock.
The conversion ratio would be adjusted pro rata for stock splits, stock
dividends, combinations, and similar actions. Prior to conversion, the shares
would have no voting rights. The shares would entitle their holders to share pro
rata with the holders of common stock and the holders of Series A Preferred
Stock in any cash dividends and any liquidation proceeds.

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: 1. would cause Rule 16b-3 under the Securities Exchange Act of
1934 to become unavailable with respect to the Plan; 2. would 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.
would 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 33,300,328 shares of
common stock issued and outstanding, based on the number of shares outstanding
on January 27, 2004 and the number of unexercised Class A Warrants and Class B
Warrants on such date. Prior to this offering, 21,040,328 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 1,452,300 shares of Preferred Stock outstanding on January
27, 2004, each of which converts into shares of common stock. As of January 27,
2004, 417,000 shares of preferred stock have been converted into 4,170,000
shares of 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 lock up 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 10,238,045 shares (which includes an option to
purchase up to 3,244,198 shares owned by Mr. Norton), 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 were passed upon by
Alfred V. Greco, PLLC, 666 Fifth Avenue, New York, NY 10103. Mr. Greco, the
principal of Alfred V. Greco, PLLC, owned 104,895 shares of SLS common stock on
the date he issued his opinion in connection with this offering.

EXPERTS

The audited financial statements of the Company as of December 31, 2002
and 2001 and for each of the three years in the period ended December 31, 2002
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.

SLS INTERNATIONAL, INC
FINANCIAL STATEMENTS

INDEX

SEPTEMBER 30, 2003

Condensed Balance Sheet F-2
Condensed Statement of Operations
For the Nine Months Ended September 30, 2003 F-3
Condensed Statement of Operations
For the Three Months Ended September 30, 2003 F-4
Statement of Cash Flows F-5
Notes to Condensed Financial Statements F-6

DECEMBER 31, 2002

Independent Auditor's Report F-15
Balance Sheet F-16
Statement of Operations F-17
Statement of Shareholders' Deficit F-18
Statement of Cash Flows F-19
Notes to Financial Statements F-20

F-1

SLS International, Inc.
Condensed Balance Sheet

September 30, December 31,
2003 2002
----------- -----------
(unaudited) (audited)

Assets
Current assets:
Cash $ 2,048,281 $ 4,240
Accounts receivable, less allowance for doubtful accounts of
$87,841 for Sept. 30, 2003 and $132,396 for December 31, 2002 139,306 165,024
Inventory 599,286 261,573
Prepaid expenses and other current assets 2,317 6,936
----------- -----------

Total current assets 2,789,190 437,773
----------- -----------

Fixed assets:
Vehicles 73,376 31,026
Equipment 59,504 55,083
Leasehold improvements 3,376 3,376
----------- -----------

136,256 89,485
Less accumulated depreciation 74,879 63,261
----------- -----------

Net fixed assets 61,377 26,224
----------- -----------

$ 2,850,567 $ 463,997
=========== ===========

Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt and notes payable $ 25,000 $ 414,720
Accounts payable 354,109 417,449
Due to shareholders 2,674 23,193
Accrued liabilities 25,778 170,897
----------- -----------

Total current liabilities 407,561 1,026,259
----------- -----------

Commitments and contingencies:
Shareholders' deficit:
Preferred stock not issued but owed to buyers, $.001 par,
5,000,000 shares authorized; 1,541,300 and 315,000 shares
at September 30, 2003 and December 31, 2002 1,541 315
Discount on preferred stock (2,555,087) (233,294)
Contributed capital - preferred 8,893,361 1,852,183
Common stock, $.001 par; 75,000,000 shares authorized;
26,948,128 shares and 21,453,528 shares issued at
September 30, 2003 and December 31, 2002 26,949 21,454
Common stock not issued but owed to buyers; 302,000 shares and
'1,222,000 shares at September 30, 2003 and December 31, 2002 302 1,222
Contributed capital - common 5,038,014 3,386,624
Unamortized cost of stock issued for services (38,881) (524,984)
Retained deficit (8,923,194) (5,065,782)
----------- -----------

Total shareholders' equity (deficit) 2,443,006 (562,262)
----------- -----------

$ 2,850,567 $ 463,997
=========== ===========

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

F-2

SLS INTERNATIONAL, INC.
CONDENSED STATEMENT OF OPERATIONS

For The Three Months Ended
September 30,
----------------------------
2003 2002
------------ ------------
(unaudited)

Revenue $ 268,023 $ 161,688

Cost of sales 128,801 123,952
------------ ------------
Gross profit 139,222 37,736

General and administrative expenses 2,123,685 605,885
------------ ------------
Loss from operations (1,984,463) (568,149)

Other income (expense):
Interest expense 14,360 (5,067)
Interest and miscellaneous, net 58,334 259
------------ ------------
72,694 (4,808)
------------ ------------
Loss before income tax (1,911,769) (572,957)

Income tax provision -- --
------------ ------------
Net loss (1,911,769) (572,957)
------------ ------------

Deemed dividend associated with beneficial conversion
of preferred stock (877,369) (180,892)
------------ ------------

Net loss availiable to common shareholders $ (2,789,138) $ (753,849)
============ ============

Basic and diluted earnings per share $ (0.11) $ (0.04)
============ ============

Weighted average shares outstanding 26,391,728 20,647,195
============ ============

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

F-3

SLS International, Inc.
Condensed Statement Of Operations

For The Nine Months Ended
September 30,
------------ ------------
2003 2002
------------ ------------
(unaudited)

Revenue $ 650,044 $ 486,204

Cost of sales 284,362 318,631
------------ ------------

Gross profit 365,682 167,573

General and administrative expenses 3,232,220 1,667,850
------------ ------------

Loss from operations (2,866,538) (1,500,277)

Other income (expense):
Interest expense (218) (18,330)
Interest and miscellaneous, net 99,272 298
------------ ------------

99,054 (18,032)
------------ ------------

Loss before income tax (2,767,484) (1,518,309)

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

Net loss (2,767,484) (1,518,309)
------------ ------------

Deemed dividend associated with beneficial conversion
of preferred stock (1,089,927) (386,118)
------------ ------------

Net loss availiable to common shareholders $ (3,857,411) $ (1,904,427)
============ ============

Basic and diluted earnings per share $ (0.16) $ (0.09)
============ ============

Weighted average shares outstanding 24,720,928 20,095,306
============ ============

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

F-4

SLS International, Inc.
Condensed Statement Of Cash Flows

For The Nine Months Ended
September 30,
--------------------------
2003 2002
----------- -----------
(unaudited)

Operating activities:
Net loss $(2,767,484) $(1,518,309)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 11,618 11,139
Amortization of cost of stock issued for services 779,103 635,352
Expenses of employee stock options granted 552,739 --
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts 25,718 34,258
Inventory (337,713) (74,003)
Prepaid expenses and other current assets 4,619 511
Accounts payable (63,340) 162,519
Due to shareholders (20,519) (2,000)
Accrued liabilities (145,119) 21,247
----------- -----------

Cash used in operating activities (1,960,378) (729,286)
----------- -----------

Investing activities:
Additions of fixed assets (46,771) (2,697)
----------- -----------

Cash used in investing activities (46,771) (2,697)
----------- -----------

Financing activities:
Sale of stock 4,440,750 645,500
Borrowing of notes payable 102,000 55,000
Repayments of notes payable (491,560) (9,146)
----------- -----------

Cash provided by financing activities 4,051,190 691,354
----------- -----------

Increase (decrease) in cash 2,044,041 (40,629)
Cash, beginning of period 4,240 48,390
----------- -----------

Cash, end of period $ 2,048,281 $ 7,761
=========== ===========

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

Noncash investing activities:
Stock issued and options granted for services $ 822,605 $ 1,073,172

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

F-5

SLS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements at September
30, 2003 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 positions as of September 30, 2003 and results of operations
and cash flows for the nine months ended September 30, 2003. 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 2002 financial
statements have been reclassified to conform to the 2003 presentations.
The statements should be read in conjunction with the financial
statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 2002.

Note 2 - Commitments and Contingencies
Going Concern
The accompanying unaudited condensed financial statements at September
30, 2003 have been prepared in conformity with U.S. generally accepted
accounting principles which contemplate the continuance of the Company
as a going concern. The Company has suffered losses from operations
during the nine months ended September 30, 2003 and the years ended
December 31, 2002, 2001, 2000, and 1999. The Company's 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 financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets and
classification of liabilities that might be necessary should the
Company be unable to continue in existence.

Note 3 - Notes Payable
The interest rate on the current notes is 7% and all are past due.

Note 4 - Stock Transactions
In May, 2001, the Company completed a public offering. The number of
shares sold was 4,000,000. Included with the purchase of the shares was
a Class A warrant and a Class B warrant. The Class A warrants expire on
February 4, 2004 and are exercisable at a price of $.50 per share. The
Class B warrants expire on August 4, 2004 and are exercisable at a
price of $3.00 per share. The warrants are detachable from the common
stock but are not separable from each other until the Class A warrant
is exercised.

F-6

From January 1, 2003 to September 30, 2003, 1,620,000 Class A warrants
were exercised for 1,620,000 shares of common stock for a total of
$810,000. As of September 30, 2003, 2,000 shares of common stock
purchased through the exercise of the A warrants in the year ended
December 31, 2002 had not been issued and therefore are shown on the
balance sheet as common stock not issued but owed to buyers. 1,096,400
Class A warrants are outstanding as of September 30, 2003. No Class B
warrants have been exercised as of September 30, 2003.

In September of 2003, 394,600 Class A warrants were exercised for
394,600 shares of common stock for $200,000 in services in lieu of cash
payment.

In the nine months ended September 30, 2003, the Company sold 1,452,300
shares of preferred stock for $3,630,750. The preferred stock offering
was closed on July 31, 2003. This preferred stock contained beneficial
conversion features. The features allows the holder to convert the
preferred to 10 shares of common stock after a one year period. A
discount on preferred shares of $3,411,720 relating to the beneficial
conversion feature was recorded on these sales, which will be amortized
over a one year period beginning with the date the shareholders
purchased their shares. $1,089,927 was amortized to retained earnings
in the nine months ended September 30, 2003. At September 30, 2003, the
unamortized beneficial conversion on preferred shares was $2,555,088.

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 will be amortized over the one year period of the agreement.
Consulting expense relating to this agreement was $1,388 for the nine
months ended September 30, 2003. On September 30, 2003, there was $0
remaining in unamortized cost of stock issued for services on the
balance sheet.

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. As of March 31, 2003, 200,000 of
the shares had not been issued and are therefore recorded as common
stock not issued but owed to buyers on these financial statements.
100,000 of the common shares were issued on November 19, 2002. 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

F-7

balance sheet as unamortized cost of stock issued for services. The
expense will be amortized over a one year period. Consulting expense
relating to these agreements was $8,790 for the nine months ended
September 30, 2003. On September 30, 2003 there was $0 remaining in
unamortized cost of stock issued for services on the balance sheet. As
of September 30, 2003, $18,000 has been paid on the note receivable. A
valuation allowance of $9,000 has been used to offset the remaining
note receivable from the transaction and therefore $0 is reflected in
the asset section of the balance sheet for the note receivables.

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.

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.

F-8

shares of common stock after a period of one year. The options expire
when the preferred stock offering closes. The closing date has been
extended to July 31, 2003. Using the Black-Scholes pricing model, the
options were valued at $311,222 and shown 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.

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 will be amortized over
the three months of the agreement.

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 will be amortized over the
one year period of the agreement. Consulting expense relating to this
agreement was $27,125 for the nine months ended September 30, 2003. On
September 30, 2003, there was $0 remaining in unamortized cost of stock
issued for services on the balance sheet.

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 March
31, 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 will be amortized over the six month period of the agreement.
Consulting expense relating to this agreement was $22,800 for the nine
months ended September 30, 2003. On September 30, 2003, there was $0
remaining in unamortized cost of stock issued for services on the
balance sheet.

F-9

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 $72,354 for the nine months ended
September 30, 2003. On September 30, 2003, there was $7,107 remaining
in unamortized cost of stock issued for services on the balance sheet.

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
amortized over the one year period of the agreement. Consulting expense
relating to this agreement was $72,354 for the nine months ended
September 30, 2003. On September 30, 2003, there was $7,107 remaining
in unamortized cost of stock issued for services on the balance sheet.

F-10

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 will be
amortized over the six month period of the agreement. Consulting
expense relating to this agreement was $191,292 for the nine months
ended September 30, 2003. On September 30, 2003, there was $0 remaining
in unamortized cost of stock issued for services on the balance sheet.

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 will
be amortized over the one year period of the agreement. Consulting
expense relating to this agreement was $90,000 for the nine months
ended September 30, 2003. On September 30, 2003, there was $24,667
remaining in unamortized cost of stock issued for services on the
balance sheet.

In February 2003, an agreement was signed with Tom Puccio for
consulting services to be performed February 25, 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 will be
amortized over the six month period of the agreement. Consulting
expense relating to this agreement was $93,000 for the nine months
ended September 30, 2003. On September 30, 2003, there was $0 remaining
in unamortized cost of stock issued for services on the balance sheet.

In the nine months ended September 30, 2003, 226,000 shares of
preferred stock were converted into 2,260,000 shares of common stock.
2,160,000 shares have been issued. The remaining 100,000 shares were
unissued at September 30, 2003 and are therefore shown in common stock
not issued but owed to buyers.

F-11

In July 2003, the Company entered into an endorsement agreement with
Steerpike Ltd. The agreement grants 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 recorded for the period July
31, 2003 to September 30, 2003 was $529,605.

Note 5 - Consulting, Promotional and Investor Relations Services
During the quarter ended September 30, 2003 SLS utilized the following
services:

Ronald Gee contracted with SLS for promotional services and was paid
$235,000 to disseminate information pursuant to SLS's obligation under
the Exchange Act. All services were rendered by September 30, 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
by September 30, 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
completed by September 30, 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 services were completed
by September 30, 2003.

F-12

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 completed by September 30, 2003.

Various individuals and corporations performed consulting services for
SLS during the quarter and were paid $152,058. All services were
substantially completed by September 30, 2003.

Note 6 - Unamortized Cost of Stock issued for Services
As detailed in Note 4, the Company issued or agreed to issue 2,795,000
shares of common stock and 1,500,000 options as part of consulting
agreements in the year ended December 31, 2002 and the nine months
ended September 30, 2003. The value of stock issued and options granted
totaled $1,692,213 for the period of January 1, 2002 through September
30, 2003. 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 will be amortized into consulting expense over the lives of the
various consulting agreements. $1,074,229 for the year ended December
31, 2002 and $579,103 for the nine months ended September 30, 2003, was
amortized into consulting expense for those periods. Unamortized cost
of stock issued for services was $38,881 as of September 30, 2003.

Note 7 - Related Party Transactions
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 have been paid in the
nine months ended September 30, 2003. The note was paid in full on June
17, 2003. The note balance on September 30, 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 $2,714 have been paid in the
nine months ended September 30, 2003. The note was paid in full on July
18, 2003. The note balance on September 30, 2003 was $0.

Note 8 - Employee Stock Options
During the second quarter of 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.

F-13

The board of directors approved 145,000 options for employees and
directors in the nine months ended September 30, 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 nine
months ended September 30, 2003.

Note 9 - Subsequent Events
In October 2003, 40,000 shares of preferred stock were converted into
400,000 shares of common stock.

From October 1 to November 6, 2003, 20,000 Class A warrants were
exercised for 20,000 shares of common stock for a total of $10,000.

F-14

Report of Independent Certified Public Accountants

Stockholders and Directors
SLS International, Inc.

We have audited the accompanying balance sheet of SLS International, Inc. as of
December 31, 2002 and 2001 and the related statements of operations,
shareholders' deficit, and cash flows for each of the years in the three year
period ended December 31, 2002. These financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
in the 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, 2002 and 2001 and the results of their operations and their cash
flows for each of the three years ended December 31, 2002 in conformity with
generally accepted accounting principles in the United States.

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
April 23, 2003

F-15

SLS International, Inc.
Balance Sheet

December 31,
---------------------------
2002 2001
----------- -----------

Assets
Current assets:
Cash $ 4,240 $ 48,390
Accounts receivable, net of allowance of $132,396 and $0
for December 31, 2002 and 2001 165,024 69,185
Inventory 261,573 250,998
Prepaid expenses and other current assets 6,936 2,081
----------- -----------
Total current assets 437,773 370,654
----------- -----------

Fixed assets:
Vehicles 31,026 47,376
Equipment 55,083 50,731
Leasehold improvements 3,376 3,376
----------- -----------
89,485 101,483
Less accumulated depreciation 63,261 64,594
----------- -----------
Net fixed assets 26,224 36,889
----------- -----------
$ 463,997 $ 407,543
=========== ===========

Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt $ 412,633 $ 357,633
Current maturities of notes payable 2,087 14,007
Accounts payable 417,449 196,833
Due to shareholders 23,193 31,886
Accrued liabilities 170,897 67,029
----------- -----------
Total current liabilities 1,026,259 667,388
----------- -----------
Notes payable, less current maturities -- 2,321
----------- -----------

Commitments and contingencies:
Shareholders' deficit:
Preferred stock not issued but owed to buyers, $.001 par,
2,000,000 shares authorized; 315,000 shares and
102,000 shares at December 31, 2002 and 2001 315 102
Discount on preferred stock (233,294) (166,694)
Contributed capital - preferred 1,852,183 446,298
Common stock, $.001 par; 75,000,000 shares authorized;
21,453,528 shares and 19,019,528 shares issued at
December 31, 2002 and 2001 21,454 19,020
Common stock not issued but owed to buyers; 1,222,000
shares and 40,000 shares at December 31, 2002 and 2001 1,222 40
Contributed capital - common 3,386,624 1,710,425
Unamortized cost of stock issued for services (524,984) --
Retained deficit (5,065,782) (2,271,357)
----------- -----------
Total shareholders' deficit (562,262) (262,166)
----------- -----------
$ 463,997 $ 407,543
=========== ===========

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

F-16

SLS International, Inc.
Statement Of Operations

Year Ended December 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------

Revenue $ 790,582 $ 353,797 $ 163,350

Cost of sales 537,243 286,924 106,535
------------ ------------ ------------

Gross profit 253,339 66,873 56,815

General and administrative expenses 2,468,565 1,068,335 813,571
------------ ------------ ------------

Loss from operations (2,215,226) (1,001,462) (756,756)

Other income (expense):
Interest expense (33,306) (46,011) (27,126)
Interest and miscellaneous, net 6,207 7,299 2,172
------------ ------------ ------------

(27,099) (38,712) (24,954)
------------ ------------ ------------

Loss before income tax (2,242,325) (1,040,174) (781,710)

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

Net loss (2,242,325) (1,040,174) (781,710)
------------ ------------ ------------

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

Net loss availiable to common shareholders $ (2,794,425) $ (1,064,880) $ (781,710)
============ ============ ============

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

Weighted average shares outstanding 20,446,711 17,406,111 14,194,405
============ ============ ============

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

F-17

SLS International, Inc.
Statement Of Shareholders' Deficit

Preferred stock Common stock
------------------------------------------------------ -------------------------
Discount on Contributed
Shares Amount Preferred Capital Shares Amount
----------- -------- ----------- ----------- ----------- -----------

Balance, January 1, 2000 -- $ -- $ -- $ -- 14,368,653 $ 14,369

Net loss for the year -- -- -- -- -- --

Cancellation of treasury stock -- -- -- -- (960,000) (960)

Sales of common stock -- -- -- -- 524,800 525

Conversion of notes payable -- -- -- -- 233,075 233

Common stock issued for services -- -- -- -- 105,000 105
----------- -------- ----------- ----------- ----------- -----------

Balance, December 31, 2000 -- -- -- -- 14,271,528 14,272
=========== ======== =========== =========== =========== ===========

Net loss for the year -- -- -- -- -- --

Sales of preferred stock 102,000 102 -- 254,898 -- --

Discount on preferred stock associated
with beneficial conversion feature -- -- (191,400) 191,400 -- --

Amortization of discount on preferred stock -- -- 24,706 -- -- --

Sales of common stock -- -- -- -- 4,000,000 4,000
less expense of sale -- -- -- -- -- --

Sales of common stock -
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 -- --

Discount on preferred stock associated
with beneficial conversion feature -- -- (618,700) 618,700 -- --

Amortization of discount on preferred stock -- -- 552,100 -- -- --

Stock issued from prior period sales -- -- -- -- -- 40

Conversion of preferred stock to common (102,000) (102) -- -- 1,020,000 --

Sales of common stock -- -- -- -- 300,000 100

Common stock issued for services -- -- -- -- 2,195,000 2,195

Options issued for services -- -- -- -- -- --

Services paid for on behalf of company -- -- -- -- -- --

Amortization of cost of common stock
issued for services -- -- -- -- -- --

Sales of common stock -
warrants exercised -- -- -- -- 101,000 99
----------- -------- ----------- ----------- ----------- -----------

Balance, December 31, 2002 315,000 $ 315 $ (233,294) $ 1,852,183 22,675,528 $ 21,454
=========== ======== =========== =========== =========== ===========
[RESTUBBED]

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

Balance, January 1, 2000 $ -- $ 338,131 $ -- $ (424,767) $ (60,000) $ (132,267)

Net loss for the year -- -- -- (781,710) -- (781,710)

Cancellation of treasury stock -- (59,040) -- -- 60,000 --

Sales of common stock -- 74,475 -- -- -- 75,000

Conversion of notes payable -- 33,067 -- -- -- 33,300

Common stock issued for services -- 14,895 -- -- -- 15,000
----------- ----------- ----------- ----------- ---------- -----------

Balance, December 31, 2000 -- 401,528 -- (1,206,477) -- (790,677)
=========== =========== =========== =========== ========== ===========

Net loss for the year -- -- -- (1,040,174) -- (1,040,174)

Sales of preferred stock -- -- -- -- -- 255,000

Discount on preferred stock associated
with beneficial conversion feature -- -- -- -- -- --

Amortization of discount on preferred stock -- -- -- (24,706) -- --

Sales of common stock -- 996,000 -- -- -- 1,000,000
less expense of sale -- (80,315) -- -- -- (80,315)

Sales of common stock -
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

Discount on preferred stock associated
with beneficial conversion feature -- -- -- -- -- --

Amortization of discount on preferred stock -- -- -- (552,100) -- --

Stock issued from prior period sales (40) -- -- -- -- --

Conversion of preferred stock 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 cost of common stock
issued for services -- -- 1,074,229 -- -- 1,074,229

Sales of 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)
=========== =========== =========== =========== ========== ===========

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

F-18

SLS International, Inc.
Statement Of Cash Flows

Year Ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------

Operating activities:
Net loss $(2,242,325) $(1,040,174) $ (781,710)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation 15,018 15,838 15,947
Amortization of cost of stock issued for services 1,074,229 -- --
Gain from sale of fixed asset (5,900) -- --
Change in assets and liabilities-
Accounts receiveable (95,839) (53,237) 34,419
Due from shareholder -- -- 3,681
Inventory (10,575) 17,564 (191,093)
Refundable income tax -- -- 14,797
Prepaid expenses and other current assets (4,855) 80,329 (61,890)
Accounts payable 220,616 (111,279) 111,056
Due to shareholders (8,693) 4,639 12,967
Deferred revenue -- (70,270) 70,270
Accrued liabilities 103,868 33,981 (37,256)
----------- ----------- -----------

Cash used in operating activities (954,456) (1,122,609) (808,812)
----------- ----------- -----------

Investing activities:
Proceeds from sale of fixed assets 5,900 -- --
Additions to fixed assets (4,353) (14,324) (13,160)
----------- ----------- -----------

Cash provided by (used in) investing activities 1,547 (14,324) (13,160)
----------- ----------- -----------

Financing activities:
Sale of stock, net of expenses 868,000 1,568,685 75,000
Borrowing of notes payable 55,000 135,000 666,267
Repayments of notes payable (14,241) (536,020) (19,284)
----------- ----------- -----------

Cash provided by used in financing activities 908,759 1,167,665 721,983
----------- ----------- -----------

Increase (decrease) in cash (44,150) 30,732 (99,989)
Cash, beginning of year 48,390 17,658 117,647
----------- ----------- -----------

Cash, end of year $ 4,240 $ 48,390 $ 17,658
=========== =========== ===========

Supplemental cash flow information:
Interest paid $ 6,766 $ 14,574 $ 7,471
Income taxes paid (refunded) -- -- --

Noncash investing activities:
Stock and options issued for services $ 1,599,213 $ -- $ 15,000
Conversion of notes payable 50,000 -- 33,300

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

F-19

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 $23,478 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 $15,018, $15,838, and $15,947 in the years
ended December 31, 2002, 2001, and 2000.

Concentration of Credit Risk:
The Company's revenues are derived principally from
uncollateralized sales to customers in the same industry;
therefore, customers may be similarly affected by changes in
economic and other conditions within the industry. There has not
been any significant credit losses on such sales.

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 $22,095 and $17,569
for the years ended December 31, 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.

F-20

SLS International, Inc.
Notes to Financial Statements.

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.

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
31, 2002, there had been no impairment in the carrying value of
long-lived 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.

F-21

SLS International, Inc.
Notes to Financial Statements.

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.

Recent Accounting Pronouncements:
In November 2002, the Financial Accountings Standards Board (FASB)
issued FASB Interpretation No.45 ("FIN 45") "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others." FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The
disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods that end after December 15,
2002. The provision for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or
modified after December 31, 2002, irrespective of a Guarantor's
year end. The adoption of FIN 45 by the Company during the quarter
ended March 31, 2003 will not have a material impact on its current
financial position and results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure, an Amendment
of FAS No. 123." SFAS No. 148 provides additional transition
guidance for those entities that elect to voluntarily adopt the
accounting provisions of SFAS No. 123. SFAS No. 148 also requires
that entities that continue to account for stock-based compensation
awards using the intrinsic value method of APB No. 25 provide more
prominent disclosures than currently required by SFAS 123,
including disclosures in interim financial statements. The
transition and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The
Company will continue to account for employee stock-based
compensation under APB No. 25 and related interpretations. The
Company will adopt the annual disclosure requirements in its
financial statements for the year ended December 31, 2003, and the
interim disclosure requirements beginning in its financial
statements for the quarter ended March 31, 2003.

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

F-22

SLS International, Inc.
Notes to Financial Statements.

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 provide 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. The Company has elected to apply the
provisions of APB No. 25 and when required provide the pro forma
disclosure provisions of SFAS No. 123.

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, 2002,
2001 and 2000, the Company incurred losses of $2,135,219, $1,040,174,
and $781,710 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, 2002, no formal
agreements had been entered into although management is negotiating
licensing agreements with entities whom 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-23

SLS International, Inc.
Notes to Financial Statements.

3. Long Term Debt
Long term debt consists of the following at December 31, 2002 and 2001:

December 31,
2002 2001
-------- --------

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. 357,633 357,633
---------- --------
412,633 357,633
Less current portion 412,633 357,633
-------- --------
Long-term portion $ -- $ --
======== ========

All long term debt is either due on demand or past due as of December
31, 2002. Interest expense accrued on long-term debt was $33,517 and
$22,584 in the years ended December 31, 2002 and 2001.

4. Commitments
Rent expense for operating leases was approximately $56,400, $33,425
and $31,500 for the years ended December 31, 2002, 2001 and 2000.
Future minimum lease commitments under non-cancelable leases for the
year ended December 31, 2003 is $37,200.

5. Income Taxes
The Company does not have an income tax provision in 2002, 2001 and
2000. The Company has loss carryforwards of approximately $3,305,000
expiring from 2011 to 2016.

Deferred tax is comprised of the following:

Non-current asset: 2002 2001 2000
----------- ----------- -----------
Net operating loss $ 1,123,700 $ 763,800 $ 415,000
Valuation allowance (1,123,700) (763,800) (415,000)
----------- ----------- -----------
Total deferred tax, net -- -- --
=========== =========== ===========

F-24

SLS International, Inc.
Notes to Financial Statements.

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

2002 2001 2000
----- ----- -----
Statutory federal income tax rate (34.0%) (34.0%) (34.0%)
Non deductible expense 17.0% 2.0% .3%
Change in valuation allowance 17.0% 32.0% 33.7%
----- ----- -----
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
2002, 2001 and 2000, the Company collected $1,740, $5,154 and $16,647
in rent for the shareholder. Company revenue from the rental totaled
approximately $174, $515 and $1,850 for the years ended December 31,
2002, 2001 and 2000.

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 $322 have been paid in the
year ended December 31, 2002. The note balance on December 31, 2002 was
$5,000.

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 $444 have been paid in the
year ended December 31, 2002. The note balance on December 31, 2002 was
$50,000.

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.

Amounts owed by or to shareholders to the Company are charged or
credited interest.

7. Major Customers and Suppliers
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.

In 2000, the Company received approximately 25% of its revenue from
three customers. The Company purchased approximately 50% of the cost of
sales from four vendors.

F-25

SLS International, Inc.
Notes to Financial Statements.

8. Stockholders' Equity
In fiscal 2000, the Company sold 524,800 shares of common stock for
$75,000. A stockholder exchanged a $33,300 demand note for 233,075
shares of common stock. The Company issued 105,000 shares of common
stock in 2000 in exchange for $15,000 in services.

On July 25, 2000 the Treasury stock was retired.

On August 10, 2000, there was a forward split of shares on a 12,800 to
1 basis. The financial statements have retroactive adjustments for the
forward stock split.

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 expire on August 4, 2003 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 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 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, 2,000
shares had not been issued. 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 2001, the Company sold 102,000 shares of preferred stock for
$255,000. 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. This preferred stock
contained a beneficial conversion feature. The feature requires 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 will
be amortized over a one year period beginning with the date the
shareholders purchased their shares.

In fiscal 2002, the Company sold 315,000 shares of preferred stock 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. This preferred stock
contained a beneficial conversion feature. The feature requires 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 will
be amortized over a one year period beginning with the date the
shareholders purchased their shares.

F-26

SLS International, Inc.
Notes to Financial Statements.

As of December 31, 2002 and 2001, $552,100 and $24,706 has been
amortized to retained earnings. At December 31, 2001, the unamortized
discount on preferred shares was $166,694. 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 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 will be 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.

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.
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. The
expense will be 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. 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.

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

F-27

SLS International, Inc.
Notes to Financial Statements.

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 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 has been
extended to 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.

F-28

SLS International, Inc.
Notes to Financial Statements.

as a debit in the equity section of the balance sheet as unamortized
cost of stock issued for services. The expense was 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 will be 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.

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 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 will be 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.

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.

F-29

SLS International, Inc.
Notes to Financial Statements.

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
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.

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 will be
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.

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 will
be 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.

F-30

SLS International, Inc.
Notes to Financial Statements.

9. Notes Payable
Notes payable consists of the following at December 31, 2002 and 2001:

December 31,
2002 2001
------- -------

Equipment note, payments in monthly
installments of $1,751 beginning May 1999,
continuing for 35 months. The final payment
is due April 2002 and will include all unpaid
principal. Interest is prime plus 1.5%
(currently 6.25%) $ -- $ 8,507

Vehicle note, payments in monthly
installments of $518 beginning June 1999,
ending April 2003. Interest at 8.75%
2,087 7,821
------- -------
2,087 16,328
Less current portion 2,087 14,007
------- -------
Long-term portion $ -- $ 2,321
======= =======

The aggregate principal amount of notes payable maturing in the year
ended December 31, 2003 is $2,087.

10. Unamortized Cost of Stock Issued for Services
As detailed in Note 8, the Company issued or agreed to issue 2,495,000
shares of common stock and granted 1,500,000 options for common stock
as part of consulting agreements. The value of stock issued and options
granted totaled $1,599,213 for the year ended December 31, 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 will be
amortized into consulting expense over the lives of the various
consulting agreements. For the year ended December 31, 2002, $1,074,229
was amortized into consulting expense. Unamortized cost of stock issued
for Services was $524,984 as of December 31, 2002, all of which will be
amortized into consulting expense in the year ended December 31, 2003.

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 2000 or 2001. In 2002, the
Company granted 1,500,000 options for services as part of consulting
agreements detailed in Note 8. The Company accounts for these grants

F-31

SLS International, Inc.
Notes to Financial Statements.

under Accounting Principles Board Opinion No. 25 under which expense
has been recognized for services. The following table summarizes the
options granted:

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

Options 2002 2001 2000
------- --------- -------- -------
Outstanding at beginning of year -- $ -- $ --

Granted 1,500,000 -- --

Exercised -- -- --

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

Outstanding at end of year 1,500,000 $ -- $ --
========= ======== =======

The weighted average exercise price of the options is $0.27.

12. Subsequent Events
In February of 2003, the Company signed a consulting agreement with Tom
Puccio for a period of six months. On February 25, 2003, the Company
issued 300,000 shares of common stock in fulfillment of this agreement.
Using the market value on the date the agreement was signed, the shares
were valued at $93,000.

In February of 2003, 42,000 shares of preferred stock were converted
into 420,000 shares of common stock.

In February of 2003, 1,020,000 shares of common stock owed to buyers at
December 31, 2002 were issued.

In February and March of 2003, 32,940 shares of preferred stock have
been sold for $82,350.

On April 19, 2003, the board of directors approved and ratified all the
consulting agreements detailed in Note 8.

F-32

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.

SEC Registration $ 0**
Legal Fees and Expenses* $ 30,000
Accounting Fees* $ 10,000
Printing* $ 5,000
Miscellaneous* $ 5,000
------------
Total $ 50,000
============
------------
* Estimated
** Previously paid

II-1

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

NINE MONTHS ENDED SEPTEMBER 30, 2003

In the nine months ended September 30, 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.

In the nine months ended September 30, 2003, the Company issued
2,014,600 shares of common stock pursuant to the exercise of outstanding Class A
Warrants. The Company received $810,000 upon the exercise of 1,620,000 of such
warrants, and charged $200,000 as an expense in lieu of payment for the
remaining 394,600 shares, which was provided as compensation to a consultant
holding the warrants for such 394,600 shares.

The net proceeds from the sale of preferred stock and from the exercise
of warrants in the first nine months of 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.

2000

In 2000, we sold 524,800 shares of common stock for $75,000, a
stockholder exchanged a $33,300 demand note for 233,075 shares of common stock,
and we issued 105,000 shares of common stock in exchange for $15,000 in
services. . 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 2000 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.

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

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

Promissory Note to Igor Levitsky Exhibit 10(ii) to Amendment No. 1 to
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

II-3

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

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

Share Purchase Agreement, dated August 8, 2001 Exhibit 10.4 to Amendment No. 1 to
between SLS International, Inc. and Les Garland 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

II-4

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

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 December 31, 2002, filed May 21, 2003
SLS 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

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

II-5

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.

Asset Purchase Agreement, dated February 6, 2004, among Exhibit 10.1 Filed herewith
Evenstar, Inc., Joel A. Butler, David L. Butler,
Patrick D. Butler and SLS International, Inc.

Stock Purchase Option Agreement, dated February 6, 2004, Exhibit 10.2 Filed herewith
among B & B Beheer B.V., Campex Holding B.V., Serge
Van Tuijn and SLS International, Inc.

List of Subsidiaries of SLS International, Inc. Exhibit 21 to Form 10-KSB for year ended
December 31, 2002, filed May 21, 2003

Consent of Weaver & Martin LLC Independent Exhibit 23 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 Filed herewith
and SLS International, Inc.

II-6

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-7

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
Februray 6, 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, February 6, 2004
------------------------------------ Chief Financial Officer, Director
John M. Gott

/s/ ROBERT H. LUKE, Ph.D Director February 6, 2004
------------------------------------
Robert H. Luke, Ph.D

/s/ MICHAEL L. MAPLES Director February 6, 2004
------------------------------------
Michael L. Maples

/s/ ED MOIST Controller February 6, 2004
------------------------------------
Ed Moist

II-8

EXHIBIT INDEX

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

10.1 Asset Purchase Agreement, dated February 6, 2004, among
Evenstar, Inc., Joel A. Butler, David L. Butler,
Patrick D. Butler and SLS International, Inc.

10.2 Stock Purchase Option Agreement, dated February 6, 2004,
among B & B Beheer B.V., Campex Holding B.V., Serge
Van Tuijn and SLS International, Inc.

23 Consent of Weaver & Martin LLC Independent Certified Public
Accountants

99.1 Modification to Consent Order of Missouri Securities Division
and SLS International, Inc.