PEOPLE confirmed on Friday that Flavin, 54, and Stallone, 76, reconciled one month after she filed for divorce after 25 years of marriage.
Now, Flavin is "much happier," a source close to the former model and businesswoman tells PEOPLE: "She has been spending time with Sly and they are slowly figuring things out. Communication has been an issue in the past, but they are both working on communicating better."
"They are amazing together when they are happy," the source adds. "Their friends can't imagine them getting a divorce. It really seems they will be able to work things out though. Everyone is happy that they are giving their marriage a second chance."
The source says the divorce filing was a wake-up call for Stallone, who shares three daughters with Flavin: Scarlet, 20, Sistine, 24, and Sophia, 26.
Jon Kopaloff/FilmMagic Sylvester Stallone and Jennifer Flavin
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"When Jen filed for divorce, she felt she had no option. She felt unheard and was very frustrated," says the source. "She had been telling Sly that she was going to file, but it seemed he didn't believe her. It pretty much came as a shock to him. He never wanted a divorce. He always wanted to work things out."
"He has been working hard to win her back. They love each other," the source adds. "They want to keep their family together."
Flavin filed a petition "for dissolution of marriage and other relief" from Stallone on Aug. 19. She alleged that he "engaged in the intentional dissipation, depletion and/or waste of marital assets which has had an adverse economic impact on the marital estate," which he denied.
Their reconciliation news came days after a Palm Beach County, Florida, court filing said both Flavin and Stallone agreed it is "in the best interests of each of them individually, and more importantly collectively as a family, to resolve all issues attendant to the dissolution of their marriage in a dignified, amicable and private manner out-of-court."
After her divorce filing last month, Flavin told PEOPLE, "I'm sad to announce that after 25 years of marriage I have filed for divorce from my husband Sylvester Stallone. While we will no longer be married, I will always cherish the more than 30-year relationship that we shared, and I know we are both committed to our beautiful daughters. I ask for privacy for our family as we amicably move forward."
Stallone, meanwhile, also said in a statement at the time, "I love my family. We are amicably and privately addressing these personal issues."