SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





xQUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For
Quarterly Period Ended June 30, 2010





or





    TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For
the transition period from
         
to





Commission
File Number 0-28585





AuraSource,
Inc.


(Exact
name of registrant as specified in its charter)








Nevada
              (State
      or Other Jurisdiction of Incorporation or Organization)
            68-0427395
              (IRS
      Employer Identification No.)





1490
South Price Rd. #219


Chandler, AZ
85286


(Address
of principal executive offices, zip code)





Registrant's
telephone number (including area code): (480)
292-7179








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


YES 
x
    NO 





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.


Large
Accelerated Filer  Accelerated Filer  Non-accelerated Filer x Smaller reporting
company 





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  No x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Class
            
            Outstanding
      at August 13, 2010Common
      Stock, $.001 par value
            
            28,262,190




















AURASOURCE,
INC.








INDEX





PART I
            FINANCIAL
      INFORMATIONITEM
    1.
            CONSOLIDATED
      FINANCIAL STATEMENTS:Consolidated
      Balance Sheets — June 30, 2010 (Unaudited) and March 31,
    2010Consolidated
      Statements of  Operations (Unaudited) — Three months ended June
      30, 2010 and 2009Consolidated
      Statements of Stockholders’ Equity (Deficit) — Three months ended June 30,
      2010Consolidated
      Statements of Cash Flows (Unaudited) —Three months ended June 30, 2010 and
      2009Notes
      to Consolidated Financial StatementsITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONSITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM
      4.
            CONTROLS
      AND PROCEDURESPART II
            OTHER
      INFORMATIONITEM
    4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 6.
            EXHIBITS










-
2 -











PART I -
FINANCIAL INFORMATION





ITEM I
— CONSOLIDATED FINANCIAL STATEMENTS





AuraSource,
Inc.


(A
Development Stage Enterprise)


Consolidated
Balance Sheets


(Unaudited)





June
      30,
            
            
            March
      31,2010
            
            
            2010ASSETS
            (Unaudited)Current
      assetsCash
      and cash equivalents
            
            $
            1,305,270
            
            
            $
            1,642,006Prepaid
      expenses
            
            
            43,750
            
            
            
            4,294Total
      current assets
            
            
            1,349,020
            
            
            
            1,646,300Fixed
      assets, net of accumulated depreciation
            
            
            29,135
            
            
            
            31,074Total
      assets
            
            $
            1,378,155
            
            
            $
            1,677,374LIABILITIES AND
      SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            54,892
            
            
            $
            32,008Accrued expenses
            
            
            30,000
            
            
            
            30,000Total
      current liabilities
            
            
            84,892
            
            
            
            62,008Commitments
      and contingenciesShareholders'
      equityPreferred
      stock, 10,000 shares authorized, no shares issued andoutstanding,
      no rights or privileges designated
            
            
            -
            
            
            
            -Common
      stock, $.001 par value, 150,000,000 shares authorized 28,262,190 shares
      issued and outstanding at June 30, 2010 and March 31, 2010,
      respectively.
            
            
            28,262
            
            
            
            28,262Committed
      common stock
            
            
            300,000
            
            
            
            -Common
      stock subscription receivable
            
            
            (300,000
            )
            
            
            -Additional
      paid in capital
            
            
            4,445,248
            
            
            
            4,451,915Accumulated
      deficit
            
            
            (3,180,247
            )
            
            
            (2,864,811
            )Total
      shareholders' equity
            
            
            1,293,263
            
            
            
            1,615,366Total
      liabilities and shareholders' equity
            
            $
            1,378,155
            
            
            $
            1,677,374The
      accompanying notes are an integral part of these consolidated financial
      statements.














-
3 -








AuraSource,
Inc.


(A
Development Stage Enterprise)


Consolidated
Statements of Operations


For
the Three months Ended June 30, 2010 and 2009 and for the Period March 15, 1990
(Inception) through June 30, 2010


(Unaudited)





From
      March 15, 1990 (Inception) to June 30,2010
            
            
            2009
            
            
            2010Revenue,
      net
            
            $
            -
            
            
            $
            -
            
            
            $
            -Cost
      of revenue
            
            
            -
            
            
            
            -
            
            
            
            -Gross
      profit
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      expenses:General
      & administrative expenses
            
            
            316,667
            
            
            
            712,448
            
            
            
            3,184,728Total
      operating expenses
            
            
            316,667
            
            
            
            712,448
            
            
            
            3,184,728Loss
      from operations
            
            
            (
    316,667)
            
            
            
            (
712,448
            )
            
            
            (3,184,728)Merger
      fee, net
            
            
            -
            
            
            
            -
            
            
            
            80,000Interest
      income / (expense) and other, net
            
            
            1,231
            
            
            
            (5,011
            )
            
            
            (75,519)Net
      loss applicable to common stockholders
            
            $
            (315,436)
            
            
            $
            (717,459)
            
            
            $
            (3,180,247)Basic
      & Diluted Loss per share
            
            $
            (0.01)
            
            
            $
            (0.03)Weighted
      average shares outstanding
            
            
            28,262,190
            
            
            
            20,826,667














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















































-
4 -





AURASOURCE,
INC.


(A
DEVELOPMENT STAGE COMPANY)


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


FOR
THE PERIOD MARCH 15, 1990 (INCEPTION)


THROUGH
JUNE 30, 2010


(Unaudited)





Preferred
      Stock
            
            
            Common
      Stock
            
            APIC
            
            Committed
      Stock
            
            Accumulated
      Deficit
            
            
            TotalShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            
            
            
            (Subscription
      Receivable)Balance
      at March 15, 1990
            
            
            
            
            $
            -
            
            
            40
            
            $
            -
            
            $
            370
            
            $
            
            
            $
            (295
            )
            $
            75Common
      stock issued for services
            
            
            
            
            
            
            
            
            352
            
            
            
            
            
            2,424
            
            
            
            
            
            
            
            
            2,424Acquire
      oil and gas properties
            
            
            7,000
            
            
            280,000
            
            
            493
            
            
            1
            
            
            82,807,828
            
            
            
            
            
            
            
            
            83,087,829Additional
      capital contributed
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,286
            
            
            
            
            
            
            
            
            22,286Fair
      value of salaries donated
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            151,500
            
            
            
            
            
            
            
            
            151,500Reclassify
      common stock for repurchase obligation
            
            
            
            
            
            
            
            
            
            
            
            (1
            )
            
            (212,500
            )
            
            
            
            
            
            
            
            (212,500
            )Rescission
      of oil and gas purchase:Common
      stock shares not returned in lieu of services
            
            
            (7,000
            )
            
            (280,000
            )
            
            
            
            
            
            
            
            (82,804,200
            )
            
            
            
            
            
            
            
            (83,084,200
            )Cancellation
      of repurchase obligation
            
            
            
            
            
            
            
            
            
            
            
            1
            
            
            212,500
            
            
            
            
            
            
            
            
            212,500Issuance
      of preferred stock for services
            
            
            1,100,000
            
            
            2,200
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,200Common
      stock for services
            
            
            
            
            
            
            
            
            27,741
            
            
            28
            
            
            9,972
            
            
            
            
            
            
            
            
            10,000Conversion
      of preferred stock
            
            
            (1,100,000
            )
            
            (2,200
            )
            
            44,874
            
            
            45
            
            
            2,155Stockholder
      advances contributed as additional paid in capital
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,725
            
            
            
            
            
            
            
            
            22,725Issuance
      of shares for acquisition of Mobile Nation, Inc.
            
            
            
            
            
            
            
            
            3,520,000
            
            
            3,520
            
            
            31,680
            
            
            
            
            
            
            
            
            35,200Common
      stock for services
            
            
            
            
            
            
            
            
            480,000
            
            
            480
            
            
            4,320
            
            
            
            
            
            
            
            
            4,800Shares
      returned to treasury
            
            
            
            
            
            
            
            
            (3,520,000
            )
            
            (3,520
            )
            
            (31,680
            )
            
            
            
            
            
            
            
            (35,200
            )Common
      stock for services
            
            
            
            
            
            
            
            
            20,000
            
            
            20
            
            
            1,980
            
            
            
            
            
            
            
            
            2,000Additional
      capital contributed
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            600
            
            
            
            
            
            
            
            
            600Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (450,598
            )
            
            (450,598
            )Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            42,231
            
            
            42,231Balance
      at March 31, 2008
            
            
            
            
            
            -
            
            
            573,500
            
            
            574
            
            
            221,960
            
            
            -
            
            
            (408,662
            )
            
            (186,128
            )Issuance
      of shares, July 2008
            
            
            
            
            
            
            
            
            19,426,500
            
            
            19,426
            
            
            188,074
            
            
            
            
            
            
            
            
            207,500Stock
      compensation
            
            
            
            
            
            
            
            
            300,000
            
            
            300
            
            
            2,791
            
            
            
            
            
            
            
            
            3,091Issuance
      of options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,407
            
            
            
            
            
            
            
            
            13,407Issuance
      of shares, March 2009
            
            
            
            
            
            
            
            
            50,000
            
            
            50
            
            
            49,950
            
            
            
            
            
            
            
            
            50,000Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (215,864
            )
            
            (215,864
            )Balance
      at March 31, 2009
            
            
            
            
            
            -
            
            
            20,350,000
            
            
            20,350
            
            
            476,182
            
            
            -
            
            
            (624,526
            )
            
            (127,994
            )Capital
      contribution
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            386,578
            
            
            
            
            
            
            
            
            386,578Issuance
      of shares for services, May 2009
            
            
            
            
            
            
            
            
            1,350,000
            
            
            1,350
            
            
            648,650
            
            
            
            
            
            
            
            
            650,000Issuance
      of shares, September 2009
            
            
            
            
            
            
            
            
            3,095,000
            
            
            3,095
            
            
            1,545,017
            
            
            
            
            
            
            
            
            1,548,112Issuance
      of shares, October 2009
            
            
            
            
            
            
            
            
            2,084,000
            
            
            2,084
            
            
            1,049,641
            
            
            
            
            
            
            
            
            1,051,725Issuance
      of shares for services, November 2009
            
            
            
            
            
            
            
            
            1,100,000
            
            
            1,100
            
            
            448,900
            
            
            
            
            
            
            
            
            450,000Issuance
      of shares for services, March 2010
            
            
            
            
            
            
            
            
            283,190
            
            
            283
            
            
            198,078
            
            
            
            
            
            
            
            
            198,361Issuance
      of options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            56,887
            
            
            
            
            
            
            
            
            56,887Offering
      costs related to share issuance
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (358,018)
            
            
            
            
            
            
            
            
            (358,018)Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,240,285)
            
            
            (2,240,285)Balance
      at March 31, 2010
            
            
            
            
            
            -
            
            
            28,262,190
            
            
            28,262
            
            
            4,451,915
            
            
            -
            
            
            (2,864,811)
            
            
            1,615,366Issuance
      of options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,333
            
            
            
            
            
            
            
            
            8,333Common
      shares committed, not issued
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            300,000
            
            
            
            
            
            300,000Stock
      subscription receivable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (300,000)
            
            
            
            
            
            (300,000)Offering
      costs related to issuance
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15,000)
            
            
            
            
            
            
            
            
            (15,000)Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (315,436)
            
            
            (315,436)Balance
      at June 30, 2010
            
            
            -
            
            $
            -
            
            
            28,262,190
            
            $
            28,262
            
            $
            4,445,248
            
            $
            -
            
            $
            (3,180,247)
            
            $
            1,293,263


-
5 -


AuraSource,
Inc.


(A
Development Stage Enterprise)


Consolidated
Statements of Cash Flows


For
the Three months Ended June 30, 2010 and 2009 and for the Period March 15, 1990
(Inception) through June 30, 2010


(Unaudited)


2010
            
            
            2009
            
            
            Cumulative
      from
              March
      15, 1990
              (Inception)
      to
              June
      30, 2010Cash
      flows from operating activities:Net
      loss
            
            $
            (315,436
            )
            
            $
            (717,459
            )
            
            $
            (3,180,247
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
            
            
            1,939
            
            
            
            172
            
            
            
            8,271Stock
      issued for services rendered
            
            
            -
            
            
            
            663,406
            
            
            
            1,326,504Options
      issued for services rendered
            
            
            8,333
            
            
            
            -
            
            
            
            78,627Fair
      value of salaries donated as capital
            
            
            -
            
            
            
            -
            
            
            
            151,500Changes
      in operating assets and liabilities:Prepaid
      expenses
            
            
            (39,457
            )
            
            
            -
            
            
            
            (43,750
            )Accounts
      payable and accrued expenses
            
            
            7,884
            
            
            
            4,734
            
            
            
            70,343Accrued
      interest payable – related parties
            
            
            -
            
            
            
            5,009
            
            
            
            15,457Non-refundable
      deposits
            
            
            -
            
            
            
            -
            
            
            
            (100,000
            )Net
      cash used in operating activities
            
            
            (336,737
            )
            
            
            (44,138
            )
            
            
            (1,673,295
            )Cash
      flows from investing activities :Advances
      to former stockholders
            
            
            -
            
            
            
            -
            
            
            
            (14,018
            )Repayment
      of advances from former stockholders
            
            
            -
            
            
            
            -
            
            
            
            14,018Advances
      from stockholders, net
            
            
            -
            
            
            
            -
            
            
            
            22,725Capital
      equipment purchases
            
            
            -
            
            
            
            -
            
            
            
            (37,406
            )Sale
      of assets to MongSource net of cash on hand
            
            
            -
            
            
            
            (88,567
            )
            
            
            (90,119
            )Net
      cash used in investing activities
            
            
            -
            
            
            
            (88,567
            )
            
            
            (104,800
            )Cash
      flows from financing activitiesProceeds
      from issuance of common stock
            
            
            -
            
            
            
            -
            
            
            
            3,144,193Offering
      costs
            
            
            -
            
            
            
            -
            
            
            
            (350,518
            )Net
      proceeds from issuance of note payable
            
            
            -
            
            
            
            205,724
            
            
            
            459,690Repayment
      of debt
            
            
            -
            
            
            
            -
            
            
            
            (170,000
            )Net
      cash provided by financing activities
            
            
            -
            
            
            
            205,724
            
            
            
            3,083,365Net
      change in cash and cash equivalents
            
            
            (336,737
            )
            
            
            73,019
            
            
            
            1,305,270Cash
      and cash equivalents - beginning balance
            
            
            1,642,006
            
            
            
            145,436
            
            
            
            -Cash
      and cash equivalents - ending balance
            
            $
            1,305,270
            
            
            $
            218,455
            
            
            $
            1,305,270Supplemental
      disclosures of cash flows information:Cash
      received/(paid) during the period for:Interest
            
            $
            -
            
            
            $
            -
            
            
            $
            -Income
      taxes
            
            $
            -
            
            
            $
            -
            
            
            $
            -Stockholder
      Advances forgiven and converted to additional paid in
    capital
            
            $
            -
            
            
            $
            -
            
            
            $
            22,725Non-Cash
      Financing Activity:Forgiveness
      of debt in exchange for all ownership interest in AuraSource, LLC, a
      Mongolian subsidiary
            
            $
            -
            
            
            $
            -
            
            
            $
            386,578


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


-
6 -








AURASOURCE,
INC.


(A
Development Stage Enterprise)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2010


(UNAUDITED)





NOTE
1.    SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Current
Operations and Background— AuraSource, Inc. (“AuraSource” or
“Company) focuses on clean energy technology development.  AuraSource
developed the AuraFuel TMand AuraCoal TMprocesses. AuraSource
formed AuraSource Qinzhou Co. Ltd., a WFOE in China to acquire these types of
Hydrocarbon Clean Fuel (“HCF”) technologies, performing research and development
related to HCF technology and products based on this technology, licensing HCF
technology to third parties and selling services and products derived from this
technology.





Through
our wholly owned subsidiary, we will conduct operations in China, to perform
research and development related to HCF technology, to sell services and
products related to and licenses for our HCF technology, and to possibly acquire
additional HCF-related technology.





Additionally,
we formed Qinzhou Kai Yu Yuan New Energy Co., Ltd., a joint venture between
AuraSource, Mongolia Energy, and Kaiyuyuan Mineral Investment Group (“KMIG”) to
build an AuraFuel plant. KMIG provided the full funding for this
plant.  AuraSource is providing the project management expertise and
the license for the AuraFuel process.  The joint venture contracted
China Shandong Metallurgical Engineering Corp. as EPC general contractor which
will provide a turnkey solution under an initial operation service
contract.  The AuraFuel plant will utilize the AuraFuel process which
AuraSource licensed from China Chemical Economic Cooperation Center
(“CCECC”).  CCECC is a Chinese governmental division which leads
China’s energy and environmental research and development. AuraSource obtained
the license for the Gulf of Tonkin Economic Region. The AuraFuel process
utilizes a low temperature catalytic process to convert oil shale and low
ranking coal into feedstock for the petrochemical industry.





There can
be no assurance we will be able to carry out our development plans for our HCF
technology, including AuraCoal and AuraFuel. Our ability to pursue this strategy
is subject to the availability of additional capital and further development of
our HCF technology.  We will also need to finance the cost of pursuing
a strategy to effectively protect our intellectual property rights in the United
States and abroad where we intend to market our technology and
products.





Going
Concern — The accompanying consolidated financial statements were
prepared assuming we will continue as a going concern.  We have
suffered recurring losses from operations since inception and have an
accumulated deficit of $3,180,247 at June 30, 2010.  The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classifications of liabilities that might be necessary should we be unable to
continue our existence.  The recovery of our assets is dependent upon
continued operations of the Company.





In
addition, our recovery is dependent upon future events, the outcome of which is
undetermined.  We intend to continue to attempt to raise additional
capital, but there can be no certainty that such efforts will be successful.





Basis of
Presentation and Principles of Consolidation — The accompanying
consolidated financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America (“US
GAAP”).





The
unaudited consolidated financial statements were prepared by us pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”). The
information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments) which are, in the opinion of management,
necessary to fairly present the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
consolidated financial statements prepared in accordance with US GAAP have been
omitted pursuant to such rules and regulations. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended March 31, 2010 included in our
Annual Report on Form 10-K. The results of the three months ended June 30, 2010
are not necessarily indicative of the results to be expected for the full year
ending March 31, 2011.





Use of
Estimates — The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.





-
7 -


Cash and Cash
Equivalents — We consider investments with original maturities of
90 days or less to be cash equivalents.





Income
Taxes — The Company accounts for income taxes in accordance with ASC
Topic 740.  Deferred tax assets and liabilities are recognized to reflect
the estimated future tax effects, calculated at currently effective tax rates,
of future deductible or taxable amounts attributable to events that have been
recognized on a cumulative basis in the financial statements. A valuation
allowance related to a deferred tax asset is recorded when it is more likely
than not that some portion of the deferred tax asset will not be
realized.





Stock-Based
Compensation — The Company recognizes the cost of employee services
received in exchange for an award of equity instruments in the consolidated
financial statements over the period the employee is required to perform the
services in exchange for the award.





Net Loss Per
Share — The Company computes basic and diluted net loss per share by
dividing the net loss available to common stockholders for the period by the
weighted average number of shares of common stock outstanding during the
period.  Common equivalent shares related to stock options and warrants
were excluded from the computation of basic and diluted earnings per share, for
the three months ended June 30, 2010 because their effect is
anti-dilutive.





Concentration of
Credit Risk — Financial instruments that potentially subject the Company
to a concentration of credit risk consist of cash.  The Company
maintains its cash with high credit quality financial institutions; at times,
such balances with any one financial institution may exceed FDIC insured
limits.





Financial
Instruments and Fair Value of Financial Instruments — Our financial
instruments consist of cash and accounts payable.  The carrying values
of cash, accounts payable, and notes payable are representative of their fair
values due to their short-term maturities. We measure the fair value of
financial assets and liabilities on a recurring basis. Fair value is defined as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. Fair value measurements are to be considered from the
perspective of a market participant that holds the asset or owes the liability.
We also establish a fair value hierarchy which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.





The
standard describes three levels of inputs that may be used to measure fair
value:





Level 1:
            
            Quoted
      prices in active markets for identical or similar assets and
      liabilities.Level 2:
            
            Quoted
      prices for identical or similar assets and liabilities in markets that are
      not active or observable inputs other than quoted prices in active markets
      for identical or similar assets and liabilities.Level 3:
            
            Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities.





The
carrying amount of the Company’s financial assets and liabilities, including
cash and accounts payable, approximate fair value, without being discounted, due
to the short-term maturities during which these amounts are
outstanding.





Recent Accounting
Pronouncements





During the three months ended June 30,
2010, there were several new accounting pronouncements issued by the FASB the
most recent of which was Accounting Standards Update 2010-21, Accounting for Technical Amendments
to Various SEC Rules and Schedules Amendments to SEC Paragraphs Pursuant to
Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and
Codification of Financial Reporting Policies (SEC Update).  Each of
these pronouncements, as applicable, has been or will be adopted by the
Company.  Management does not believe the adoption of any of these
accounting pronouncements has had or will have a material impact on the
Company’s financial statements.





-
8 -


NOTE
2 – NOTE PAYABLE





On July
11, 2008, we entered into a Revolving Promissory Note (the “Note”) with
Mongsource USA, LLC, the majority stockholder of the Company.  
Through June 11, 2009, Mongsource USA, LLC had advanced us approximately
$475,000.  On September 6, 2008, we entered into an Exploration
Licenses Transfer Agreement, with Mongsource USA, LLC, under which Mongsource
USA, LLC transferred to the Company three mineral exploration licenses in
Mongolia.





On June
11, 2009, we entered into an agreement with MongSource USA, LLC where by we
transferred all rights and ownership interests in our assets relating to the
exploration and development of mineral resources which includes all assets of
AuraSource LLC, a Mongolian subsidiary, for the forgiveness of the Note and all
amounts due under the Note.  We recorded a capital contribution of
$386,578 to account for this agreement.





NOTE
3 – DISCONTINUED OPERATIONS





As
explained in Note 2, on June 11, 2009, we entered into an agreement with
MongSource USA, LLC where by we transferred all rights and ownership interests
in our assets relating to the exploration and development of mineral resources
which includes all assets of AuraSource LLC, a Mongolian subsidiary, for the
forgiveness of the Note and all amounts due under the Note.





NOTE
4 - CONCENTRATION OF CREDIT RISK





We
maintain our cash balances in various financial institutions that from time to
time exceed amounts insured by the Federal Deposit Insurance Corporation (up to
$250,000, per financial institution as of June 30, 2010). As of June 30, 2010,
our deposits exceeded insured amounts by approximately $327,000.  We
have not experienced any losses in such accounts and we believe we are not
exposed to any significant credit risk on cash.




Currently,
we maintain a bank account in China.  As of June 30, 2010, we had
$715,777 in this account.  This account is not insured and we believe
is exposed to significant credit risk on cash.





NOTE
5 – STOCK ISSUANCE





On May
28, 2009, Mr. Liu, our CEO, was granted 1,000,000 restricted shares for his
services from July 8, 2008 to May 31, 2009.   During such time, Mr.
Liu received no other compensation. Additionally, Mr. Liu, Mr. Kohler, our
Secretary, and Mr. Stoppenhagen, our CFO, were granted, 100,000 shares of
restricted stock which vests the earlier of two years or termination from the
board.  The Company recorded stock compensation arising from the
grants of $13,407 and $650,000.





On
October 22, 2009, the Company completed a private placement to certain
institutional and accredited investors (“Investors”) pursuant to which the
Company sold 5,279,693 shares of the Company’s common stock for $2,639,847. The
Company intends to use proceeds of the offering for working capital and to
develop a pilot plant in the Gulf of Tonkin Economic and Development Area which
utilizes a low temperature catalytic process to reform oil shale, asphalt shale
and low-ranking coal to hydrocarbon clean fuel products in a highly-efficient
manner. The Company has no material relationship with any of the institutional
and accredited investors participating in the private placement offering other
than in respect of the Subscription Agreements.





In
connection with the closing of the private placement offering, the Company paid
$263,985 to Source Capital Group, Inc. as exclusive agents for the private
placement offering and will issue Source Capital Group, Inc. 527,969 three year
warrants.





On
November 2, 2009, the Board of Directors (“BOD”) granted Mr. Liu, Mr. Kohler and
Mr. Stoppenhagen 100,000 shares of restricted stock which vests the earlier of
two years or termination from the board.  The Company recorded stock
compensation arising from the grants of $150,000.





On
December 18, 2009, the Board of Directors granted two consultants 800,000 shares
of restricted stock 600,000 of which vests immediately and 200,000 of which
vests quarterly over three years.  The Company recorded stock
compensation arising from the grants of $308,333 during the three and nine
months ended December 31, 2009.





On March
1, 2010, the BOD granted two consultants 283,000 shares of common
stock.  The Company recorded stock compensation arising from the
grants of approximately $198,000 during the year ended March 31,
2010.





During
the three months ended June 30, 2010, the Company recorded a stock subscription
receivable of $300,000.  In connection with this subscription
receivable, the Company has incurred $15,000 in commission expense that has been
included in accounts payable at June 30, 2010.  The Company has not
yet issued shares for this and also recorded committed common stock of
$300,000.  The Company has committed to issue 240,000 shares of common
stock at $1.25 per share with a par value of $0.001.


-
9 -





NOTE
6 - STOCK OPTIONS





In
January 2009, we granted 60,000 options to purchase shares of our common stock
at an exercise price of $3.50 to members of our BOD. The options vest quarterly
starting January 1, 2009 and have an expiration period of 10 years.  We
will record compensation expense of $53,628 in the quarters in which the options
vest.  During the three months ended June 30, 2010, the Company has
recorded $8,333 in compensation expense related to the vesting of
options.  The Company assumed all stock options issued during the
quarter will vest.   Though these expenses will result in a deferred
tax benefit, we have a full valuation allowance against the deferred tax
benefit.





The
Company adopted the detailed method provided in  ASC 718 for
calculating the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the income tax effects of employee stock-based compensation awards
that are outstanding.





The fair
value of each stock option granted is estimated on the grant date using the
Black-Scholes option pricing model.  The Black-Scholes option pricing
model has assumptions for risk free interest rates, dividends, stock volatility
and expected life of an option grant.  The risk free interest rate is
based upon market yields for United States Treasury debt securities at a 7-year
constant maturity.  Dividend rates are based on the Company’s dividend
history.  The stock volatility factor is based on the last 60 days of
market prices prior to the grant date.  The expected life of an option
grant is based on management’s estimate.  The fair value of each
option grant, as calculated by the Black-Scholes method, is recognized as
compensation expense on a straight-line basis over the vesting period of each
stock option award.





The
following assumptions were used to determine the fair value of stock options
granted using the Black-Scholes option-pricing model:





Dividend
      yield
            
            
            0.0
            %Volatility
            
            
            25
            %Average
      expected option life
            
            5.00
      yearsRisk-free
      interest rate
            
            
            1.76
            %





The
following table summarizes activity in the Company's stock option grants for the
three months ending June 30, 2010:





Number
      of
              Shares
            
            
            Weighted
      Average Price Per ShareBalance
      at March 31, 2010
            
            
            60,000
            
            
            $
            3.50Granted
            
            
            -
            
            
            
            -Balance
      at June 30, 2010
            
            
            60,000
            
            
            
            3.50





The
following summarizes pricing and term information for options issued to
employees and directors which are outstanding as of June 30, 2010:





Options
      Outstanding
            
            Options
      ExercisableRange
      of Exercise Prices
            
            Number
      Outstanding at June 30, 2010
            
            Weighted
      Average Remaining Contractual
              Life
            
            Weighted
      Average Exercise Price
            
            Number
      Exercisable at June 30, 2010
            
            Weighted
      Average Exercise Price$3.50
            
            
            60,000
            
            
            9.00
            
            
            $3.50
            
            
            60,000
            
            
            $3.50





-
10 -





NOTE
7 - LOSS PER SHARE





The
following table sets forth common stock equivalents (potential common stock) for
the three months ended June 30, 2010 and 2009 that are not included in the loss
per share calculation above because their effect would be anti-dilutive for the
periods indicated:





Three
      months Ended June 30,2010
            
            
            2009Weighted
      average common stock equivalents:Non-Plan
      Stock Options
            
            
            60,000
            
            
            
            60,000








NOTE
8 – RELATED PARTY TRANSACTIONS





On July
11, 2008, we entered into a Revolving Promissory Notewith Mongsource, our
majority stockholder. Under the terms of the Note, Mongsource agreed to advance
to the Company, from time to time and upon request of the Company, amounts up to
$500,000 during the commitment period, commencing July 11, 2008 and expiring
December 31, 2009 (the “Expiration Date”). The Note accrued interest at 10%. All
advances made under the Note and all accrued and unpaid interest thereon due and
payable on the Expiration Date. The Note included customary default provisions
and provides that all obligations under the Note will accelerate and become
immediately due and payable upon the occurrence of an event of default,
including default in payment, breach by the Company of any material provisions
of the Note, or the commencement and continuation of a bankruptcy proceeding.
The Note provided that upon the occurrence of an event of default, Mongsource
held a first credit position on the entire amount owed on the Note, including
the all unpaid principal and interest and interest will continue to accrue after
the event of default at 10% or the legal rate of interest, whichever is
lower.





In
December 2008, we entered into an agreement with a firm affiliated with Mr. John
P. Boesel, III, a Senior Vice President and Branch Manager of Source Capital
Group and paid a commission of $263,985 to Source Capital Group, Inc., $52,797
for unaccountable expenses and was issued 527,969 three year
warrants.  Mr. Boesel is also a founding investor and director of
Mongsource BVI and a member, manager and founding investor of
Mongsource.





On June
11, 2009, we entered into an agreement with MongSource USA, LLC where by we
transferred all rights and ownership interests in our assets relating to the
exploration and development of mineral resources which includes all assets of
AuraSource LLC, a Mongolian subsidiary, in exchange for the forgiveness of the
Note and all amounts due under the Note. We recorded a capital contribution of
$386,578 as of the result of this agreement.





Effective
August 1, 2009, we entered into an Employment Agreement (the “Employment
Agreement”) with Philip Liu, the Company’s CEO.  Under the Employment
Agreement, Mr. Liu will receive a base salary of $240,000 per year and
guaranteed bonus of $40,000 per year.  Mr. Liu will be eligible for an
incentive bonus based on his performance.  Additionally, Mr. Liu will
receive a car allowance of $500 per month and an office allowance of $500 per
month. The term of the contract is from August 1, 2009 to March 31,
2014.  For the quarter ended June 30, 2010, Mr. Liu received
$73,000 as total compensation pursuant to this Employment
Agreement.
















-
11 -








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





The
information contained in this Form 10-Q is intended to update the information
contained in our Annual Report on Form 10-K for the year ended March 31, 2010
and presume readers have access to, and will have read, the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
other information contained in such Form 10-K.  The following
discussion and analysis also should be read together with our consolidated
financial statements and the notes to the consolidated financial statements
included elsewhere in this Form 10-Q.





The
following discussion contains certain statements that may be deemed
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995.  Such statements appear in a number of
places in this Report, including, without limitation, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”  These
statements are not guarantees of future performance and involve risks,
uncertainties and requirements that are difficult to predict or are beyond our
control.  Forward-looking statements speak only as of the date of this
quarterly report. You should not put undue reliance on any forward-looking
statements.  We strongly encourage investors to carefully read the
factors described in our Annual Report on Form 10-K for the year ended March 31,
2010 in the section entitled “Risk Factors” for a description of certain risks
that could, among other things, cause actual results to differ from these
forward-looking statements. We assume no responsibility to update the
forward-looking statements contained in this quarterly report on Form 10-Q. The
following should also be read in conjunction with the unaudited consolidated
financial statements and notes thereto that appear elsewhere in this
report.





Overview





AuraSource,
Inc., a Nevada corporation, (“AuraSource” or the “Company”) focuses on clean
energy technology development.  AuraSource developed the
AuraFuel TMand
AuraCoal TMprocesses. AuraSource
formed AuraSource Qinzhou Co. Ltd. (“AuraSource Qinzhou Co. Ltd.” or “AC”), a
Wholly Foreign Owned Enterprise (“WFOE”) in China to acquire these types of
Hydrocarbon Clean Fuel (“HCF”) technologies, performing research and development
related to HCF technology and products based on this technology, licensing HCF
technology to third parties and selling services and products derived from this
technology. The Company was incorporated on November 6, 1998 and started its
current business in December 2008.





Through
our WFOE, we will conduct operations in China, to perform research and
development related to HCF technology, to sell services and products related to
and licenses for our HCF technology, and to possibly acquire additional
HCF-related technology.





Additionally,
we formed Qinzhou Kai Yu Yuan New Energy Co., Ltd., a joint venture between
AuraSource, Mongolia Energy, and Kaiyuyuan Mineral Investment Group (“KMIG”) to
build an AuraFuel plant. KMIG provided the full funding for this
plant.  AuraSource is providing the project management expertise and
the license for the AuraFuel process.  The joint venture contracted
China Shandong Metallurgical Engineering Corp. as EPC general contractor which
will provide a turnkey solution under an initial operation service
contract.  The AuraFuel plant will utilize the AuraFuel process which
AuraSource licensed from China Chemical Economic Cooperation Center
(“CCECC”).  CCECC is a Chinese governmental division which leads
China’s energy and environmental research and development. AuraSource obtained
the license for the Gulf of Tonkin Economic Region. The AuraFuel process
utilizes a low temperature catalytic process to convert oil shale and low
ranking coal into feedstock for the petrochemical industry.





Hydrocarbon Clean Fuel (HCF)
Technology





We
believe our HCF technology, AuraCoal TM, is a next generation
of hydrocarbon clean fuel technology. It involves grinding coal into fine
particles, mixing it with water and selected chemicals to make a slurry and
using a proprietary biological treatment of the coal slurry mixture to reduce
heavy minerals, such as sulfur.  We believe such slurry will have
sufficient fluidity to move through pipelines, process delivery piping and
burner injection nozzles. Our goal is to demonstrate to power plants and similar
users that our HCF technology can convert their plants to use the technology at
a lower cost than any current alternative.  Given sufficient capital
and development of our HCF technology, we plan to market it to plants in China
and the United States with the objective of having a beta demonstration site in
each country.





-
12 -





Given sufficient capital, development and
protection of our HCF technology, among other factors, AuraSource plans to
utilize the HCF technology as follows:





·
            license
      HCF technology to international clients in applicable industries, such as
      coal producers and power plants;·
            develop
      strategic partnerships to deliver consulting services with respect to
      design, engineering, procurement and construction for HCF
      applications;·
            enter
      into joint ventures with coal producers to supply HCF treated coal to
      power plants;·
            process
      coal using HCF technology and sell such coal to end users at a marked-up
      price;·
            assist
      customers to convert their plants to HCF rather than oil, gas or other
      natural resources in order to save energy costs; and·
            establish
      centers for processing coal with our HCF technology to supply power plants
      and other customers.








AuraCoal tmClean Coal
Technology





AuraCoal
is patent pending technology designed to remove sulfur and ash from coal
pre-combustion. This reduces energy costs and helps to eliminate harmful
emissions. This proprietary clean coal technology produces a coal water mixture,
which contains only trace amounts of sulfur and ash and constitutes a
superb alternative to oil or natural gas. AuraCoal can be delivered via pipeline
in a non-volatile state. The conversion to an AuraCoal system is designed to
deliver immediate and substantive reductions in harmful particle emissions
as well as savings in transportation, processing and safety costs. AuraSource
plans to commence construction of its pilot plant in November
2010  and distribute the coal based clean industrial fuel produced by
this proprietary new generation of clean coal technology in 2011.





AuraCoal
is a new generation of HCF technology. With the adoption of our proprietary
AuraCoal Clean Coal technology, we believe we will be able to convert old coal
systems into power generating systems that produce emissions containing only
trace amounts of sulfur and ash.  We believe AuraCoal technology
can:





·
            reduce
      harmful emissions and energy costs;·
            reduce
      and/or eliminate the need for scrubbers;·
            reduce
      a power plant’s need for related precipitators and/or sulfur acceptors;
      and·
            enable
      a power plant to effectively manage its carbon
  emissions.








AuraFuel tm





AuraSource
also licensed another proprietary hydrocarbon clean fuel technology, AuraFuel,
which utilizes a low temperature catalytic process to convert oil shale, asphalt
shale and low-ranking coal to hydrocarbon clean fuel products in a highly
efficient manner. This technology was developed by the Energy and Environmental
Research Institute of Heilongjiang (“EERI”), a Chinese government owned energy
research institute. EERI patented the technology and the production process.
AuraSource licensed this technology for Guangxi province of China and the United
States.  We are currently developing our own intellectual property
associated with this technology.  AuraSource through its joint
venture, China Qinzhou KaiYuYuan New Energy Co., Ltd. started construction on a
pilot plant in April 2010 with production anticipating to begin in
2011.  In the United States, we are currently in our planning stages
and pursuing a suitable site on public or private lands to start a pilot plant
in 2011.





The
process is an above-ground retorting technology, which has a simple and robust
design, energy self-sufficiency, minimal water usage, and high oil
yields.





The
AuraFuel process consists of the following main steps:





1)
            Crushing.
      Before retorting, raw oil shale is crushed into fine
      particles.2)
            Retorting.
      The AuraFuel process uses an annular rotary retort that heats raw oil
      shale. Due to the rotating feature, the retorting is a continuous process.
      The annular retort consists of several zones, including heating zone,
      reaction zone and heat recovery zone. Incoming raw shale goes into the
      heating zone in which the shale is heated. Then the shale enters the
      reaction zone in which pyrolysis of oil shale happens. Most of the
      pyrolysis is complete in the reaction zone. In the heat recovery zone, the
      spent shale is cooled and waste heat is recycled. After one cycle of
      motion, the retorting process is complete and spent shale is
      discharged.3)
            Post-processing.
      Produced oil vapors and gases are cleaned and delivered to a condensation
      system where oil condenses and non-condensable gases are fed back to the
      retort as energy sources. The oil goes through a distillation process to
      produce gasoline, diesel or residual
oil.








-
13 -


There can
be no assurance we will be able to carry out our development plans for our HCF
technology, including AuraCoal and AuraFuel. Our ability to pursue this strategy
is subject to the availability of additional capital and further development of
our HCF technology.  We will also need to finance the cost of pursuing
a strategy to effectively protect our intellectual property rights in the United
States and abroad where we intend to market our technology and
products.





HCF
Overview





We
believe our HCF technology will provide an emerging type of energy saving and
emission reducing fuel substitute for oil. The HCF coal product appears to
exhibit fuel economy, liquidity and stability, ease of loading and unloading,
storage and transportation without precipitation of the product. It seems to be
conducive to pumping over long-distance pipelines, transport by railway and
truck tankers and maritime shipping.





Hydrocarbon
clean fuel atomization performance depends on the energy value of coal
preparation and concentration, which we believe is generally the equivalent of
half the energy value of heavy oil, industrial boilers, industrial kilns, power
generation boiler oil and coal combustion generation.





We
believe HCF has a broad range of industrial applications.  Our initial
objective will be to pursue applications related to power plants and industrial
boilers, including steam and hot water boilers.





First Generation Coal-Water
Slurry (Slurry Generation)





The first
generation of HCF occurred at the U.S. Black Mesa coal slurry pipeline, which is
the only operating long-distance coal-water slurry pipeline in the world.
See www.informaworld.com/index/778734328.pdf.  This
pipeline traverses 273 miles, with an annual capacity of 4,800,000
tons.  See http://www.britannica.com/EBchecked/topic/68053/Black-Mesa-pipeline.   The
coal was liquefied to be transported economically.





The Second Generation
Hydrocarbon clean fuel (Mixture Generation)





In the
second generation process, coal is a coal-water slurry physically processed with
new products, consisting of approximately 65% to 70% coal and 35% to 30% water
and trace chemical additives prepared in a paste, commonly known as high
concentration coal-water slurry, or water coal slurry.





The Third Generation
Hydrocarbon clean fuel (The Ultra-Fine Coal-Water Fuel
Generation)





We
believe our technology will be the third generation of HCF. We believe the third
generation of HCF will be a lower-cost and more efficient technology that can be
used in greater depth and in a wider array of applications, and may be an
alternative to oil resource applications.  We expect the third
generation of HCF technology will contain only trace amounts of sulfur and ash,
in fine particle sizes, which allows the burning of the mixture to cause minor
wear and tear on equipment. Additionally, we believe the use of ultra-fine
grinding machines allows preparation of an ultra-fine paste for a new type of
fuel. We believe the HCF technology may yield potential environmental advantages
relative to heavy oil.





Competition





HCF
Technology





We face
competition from large companies like Arch Coal, Peabody Massey Energy Company,
CONSOL Energy, Foster-Wheeler, GreatPoint Energy, Evergreen Energy, Inc.,
CoalTek, Inc., Babcock & Wilcox Company, and Yanzhou Coal Mining Company as
well as numerous universities and government agencies who have greater
financial, marketing, distribution and technological resources than we
have, and they may have more well-known brand names in the
markets.  They may also seek to enter and compete with us in our
market.





More
indirect competition comes from alternative low-pollution energy sources,
including: wind, bio-fuels and solar; all of which need additional technological
advancements to be able to produce power at the scale of coal-fueled plants,
which today produce 43% of world’s electricity according to U.S. Department of
Energy figures published in May 2008.








-
14 -








Patent
and Trademarks





The
Company currently relies on unregistered trademarks and patents, and
confidentiality of trade secrets.  Our ability to compete effectively
will depend on our success in protecting the HCF proprietary technology, both in
the United States and abroad.  There are numerous patents or patent
applications relating to HCF. We have filed for patent protection and taken the
steps required to obtain international patent protection.





No
assurance can be given that any patents relating to the HCF technology will be
issued by the United States or any foreign patent offices.  Further,
no assurance can be given that we will receive any patents in the future based
on the continued development of the HCF technology, or that the HCF technology
patent protection within and/or outside of the United States will be sufficient
to deter others, legally or otherwise, from developing or marketing competitive
products utilizing our HCF technology.  If patent protection is not
available for the HCF technology, we plan to treat it as a trade
secret.  There can be no assurance that we will be successful in this
regard.





In
addition to seeking patent protection, we will rely on trade secrets, know-how
and continuing technological advancement to seek to achieve and thereafter
maintain a competitive advantage in the HCF market.  Although we have
entered into or intend to enter into confidentiality and invention agreements
with our employees, consultants and advisors, no assurance can be given that
such agreements will be honored or that we will be able to effectively protect
our rights to our unpatented trade secrets and know-how.  Moreover, no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our trade secrets and know-how.





Government
Regulations





United
States





We
believe that existing and proposed legislation and regulations could impact
fossil fuel-fired, and specifically coal-fired, power generating facilities
nationally and internationally.





The
following briefly describes the most significant existing national laws and
regulations affecting the potential market for coal processed using our
technology. State and regional policies may also impact our market.





The Clean Air Act and Acid Rain
Program.    The Clean Air Act of 1970, as
amended, is currently the primary mechanism for regulating emissions of sulfur
dioxide and nitrogen oxide from coal-fired power generating facilities. A key
component of the act regulates sulfur dioxide and nitrogen oxide emissions.
Specifically, title IV set a goal of reducing sulfur dioxide emissions by
10 million tons below 1980 levels and imposed a two-phased tightening of
restrictions on fossil fuel-fired power plants. Phase I began in 1995 and
focused primarily on coal-burning electric utility plants in the east and
midwest. In 2000, Phase II began and this phase tightened the annual
emissions' limits on larger higher emitting plants and set restrictions on
smaller, cleaner plants fired by coal, oil, and gas. The Acid Rain Program calls
for a 2 million ton reduction in nitrogen oxide emission and focuses on one
set of sources that emit nitrogen oxide: coal-fired electric utility boilers.
Beginning in January 2000, nitrogen oxide emissions are to be reduced 900,000
tons per year beyond the 1.2 million per year reduction set by the EPA in
1995.





Clean Air Interstate
Rule.    The Clean Air Interstate Rule was
finalized by the EPA in March 2005. Once fully implemented, this rule will
reduce sulfur dioxide emissions in 28 states and the District of Columbia by
more than 70% and nitrogen oxide emissions by more than 60% from the 2003
levels. Through the use of a cap-and-trade approach, the rule promises to
achieve substantial reduction of sulfur dioxide and nitrogen oxide emissions.
Reductions of nitrogen oxide emissions began in January 2009, followed by
reductions of sulfur dioxide emissions in January 2010. The program will be
fully implemented by January 2015.





Clean Air Mercury
Rule.    The U.S. Environmental Protection
Agency, or EPA, finalized the Clean Air Mercury Rule, or CAMR, on March 15,
2005 to reduce mercury emissions from coal-fired power plants. Phase 1 of
CAMR was set to go into effect on January 1, 2010. However, on
February 8, 2008, the U.S. Circuit Court of Appeals for the District of
Columbia vacated the rule, requiring EPA to draft a new regulation. As a result
of this ruling, it is likely that individual coal-fired boilers and power plants
will be held to stringent levels of mercury emission reductions instead of
averaging mercury emissions across multiple plants and across the
country.


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China





The Environmental Protection Law
(“EPL”) of the People’s Republic of China (“PRC”) governs us and our HCF
products.  The EPL, promulgated by the National People’s Congress on
December 26, 1989, is the cardinal law for environmental protection in
China. The law establishes the basic principle for coordinated advancement of
economic growth, social progress and environmental protection, and defines the
rights and duties of governments at all levels. Local environmental protection
bureaus may set stricter local standards than the national standards and
enterprises are required to comply with the stricter of the two sets of
standards. The EPL requires any entity operating a facility that produces
pollutants or other hazards to incorporate environmental protection measures
into its operations and to establish an environmental protection responsibility
system, which must adopt effective measures to control and properly dispose of
waste gases, waste water, waste residue, dust or other waste
materials.





Violators
of the EPL and various environmental regulations may be subject to warnings,
payment of damages and fines. Any entity undertaking construction work or
manufacturing activities before the pollution and waste control and processing
facilities are inspected and approved by the relevant environmental protection
bureau may be ordered to suspend production or operations and may be fined. The
violators of relevant environment protection laws and regulations may be exposed
to criminal liability if violations result in severe loss of property, personal
injuries or death.





In
addition, China is a signatory to the 1992 United Nations Framework Convention
on Climate Change and the 1997 Kyoto Protocol, which are intended to limit
emissions of greenhouse gases.  Efforts to control greenhouse gas
emission in China could result in reduced use of coal if power generators switch
to sources of fuel with lower carbon dioxide emissions, which in turn could
reduce the revenues of our business and have a material adverse effect on
our results of operations.





The
Company endeavors to ensure the safe and lawful operation of its facilities in
manufacturing and distribution of HCF and believes it is in compliance in all
material respects with applicable PRC laws and regulations.





No
enterprise may start production at its facilities until it receives approval
from the Ministry of Commerce to begin operations.


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Critical Accounting Policies
and Estimates





The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("USGAAP") requires management to make estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amount of expenses during the reporting period. On an ongoing
basis, we evaluate our estimates which are based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. The result of these evaluations forms the basis for making
judgments about the carrying values of assets and liabilities and the reported
amount of expenses that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions. The
following accounting policies require significant management judgments and
estimates:







We
account for our business acquisitions under the purchase method of accounting in
accordance with Financial Accounting Standards Board (“FASB”) Codification Topic
805, "Business Combinations." The total cost of acquisitions is allocated to the
underlying net assets, based on their respective estimated fair values. The
excess of the purchase price over the estimated fair value of the tangible net
assets acquired is recorded as intangibles. Determining the fair value of assets
acquired and liabilities assumed requires management's judgment and often
involves the use of significant estimates and assumptions, including assumptions
with respect to future cash inflows and outflows, discount rates, asset lives,
and market multiples, among other items.





We base
our estimates on historical experience and various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. There can be no assurance that
actual results will not differ from these estimates.





Certain
reclassifications have been made to the prior fiscal year amounts disclosed in
the consolidated financial statements to conform to the presentation for the
period ended June 30, 2010. These reclassifications had no effect on the
reported net loss or stockholders’ equity.





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17 -


Results
of Operations





For the Three Months Ended
June 30, 2010 and 2009





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $316,667 and $712,448 for the three
months ended June 30, 2010 and 2009, respectively.  The decrease of
$395,781 in expense was due to a decrease in stock related
compensation.





Interest
Income, Interest Expense and Other





Interest
income/(expense) and other was $1,231 and $(5,011) for the three months ended
June 30, 2010 and 2009, respectively.  The increase in interest income
is the result of higher cash balances.







Liquidity and Capital
Resources





Net cash
used in operating activities was $321,737 and $44,138 in the three months ended
June 30, 2010 and 2009, respectively.  The increase was primarily due
to non-cash transaction of stock issued for services rendered added back to
operating activities in the prior year.  There were no such amounts
added back in the current period.





Net cash
used in investing activities was $0 and 88,567 in the three months ended June
30, 2010 and 2009, respectively.  The decrease was due to the
transferring of all rights and ownership interests in assets relating to the
exploration and development of mineral resources to Mongsource in the period
ended June 30, 2009.





Net cash
provided by financing activities was $0 and $205,724 in the three months ended
June 30, 2010 and 2009, respectively.  The difference of $205,724 in
cash flows from financing activities was primarily due to proceeds from the
issuance of a note payable in the prior period.





The
Company suffered recurring losses from operations and has an accumulated deficit
of 3,180,247 at June 30, 2010.  Currently, we have not generated any
revenues. The Company is seeking various forms of
financing.





Inflation and
Seasonality





Inflation
has not been material to us during the past five years. Seasonality has not been
material to us.





Recent Accounting
Pronouncements





Refer to
the notes to the consolidated financial statements for a complete description of
recent accounting standards which we have not yet been required to implement and
may be applicable to our operation, as well as those significant accounting
standards that have been adopted during the current year.





Off-Balance
Sheet Arrangements





As of
June 30, 2010, we did not have any off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of Regulation S-K.











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18 -








ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





As a “smaller reporting company” as
defined by Rule 229.10(f)(1), we are not required to provide the information
required by this Item 3.








ITEM
4 - CONTROLS AND PROCEDURES





EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES.   Our management, with the participation of our
president and our chief financial officer, carried out an evaluation of the
effectiveness of our "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-15(e)
and 15-d-15(e)) as of the end of the period covered by this report (the
"Evaluation Date"). Based upon that evaluation, our President and our
Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under
the Exchange Act (i) is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms and (ii) is
accumulated and communicated to our management, including our President and
our Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.





CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING.   There were no changes in our internal
controls over financial reporting that occurred during the quarter ended June
30, 2010 that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. We believe that a
control system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the control system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within any company have been
detected.





PART II -
OTHER INFORMATION


ITEM
1 – LEGAL PROCEEDINGS





We are
not a party to any current or pending legal proceedings that, if decided
adversely to us, would have a material adverse effect upon our business, results
of operations, or financial condition, and we are not aware of any threatened or
contemplated proceeding by any governmental authority against us.  To
our knowledge, we are not a party to any threatened civil or criminal action or
investigation.





ITEM 1A – RISK
FACTORS





In
addition to the other risk factors and information set forth in this
report, you should carefully consider the factors discussed in Part I, “Item 1A.
Risk Factors” in our Annual Report on Form 10-K for the year ended March 31,
2010, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition, operating results and/or cash
flows.





ITEM
      2
            -
      UNREGISTERED SALES OF EQUITY
SECURITIES





None





ITEM
      3
            -
      DEFAULTS UPON SENIOR SECURITIES





None





ITEM
4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None





ITME
      5
            -
      OTHER INFORMATION





None








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19 -











ITEM
6.


Exhibit
            
            Description31.1
            
            Certification
      of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and 15d-14
      as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            
            Certification
      of Chief Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14
      as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
      2002.32
            
            Certification
      of the Company’s Chief Executive Officer and Chief Financial Officer,
      pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.











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20 -











SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





AURASOURCE,
      INC.Date:
      August 13, 2010
            /s/ 
      PHILIP LIUName:
      PhilipTitle: Chief
      Executive OfficerDate:
      August 13, 2010
            /s/ 
      ERIC STOPPENHAGENName:
      Eric StoppenhagenTitle: Chief
      Financial Officer




















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21 -








EXHIBIT
INDEX





Exhibit
            
            Description31.1
            
            Certification
      of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and 15d-14
      as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            
            Certification
      of Chief Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14
      as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
      2002.32
            
            Certification
      of the Company’s Chief Executive Officer and Chief Financial Officer,
      pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.








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