SECURITIES  AND EXCHANGE COMMISSION   Washington, D.C. 20549

**Form  10-K**  (Mark One)

**ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**

x  For the fiscal year ended......................................February 29,  2004  OR ̈ TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934 [NO FEE REQUIRED]  For the transition period from to.............................................  Commission File Number...................................................**0-17249****AURA SYSTEMS, INC.**(Exact name of Registrant as specified in its charter)

| **Delaware**                                                            | **95-4106894**                                |
|-------------------------------------------------------------------------|-----------------------------------------------|
| (State          or other jurisdiction of incorporation or organization) | (I.R.S.          Employer Identification No.) |

**2335  Alaska Avenue  El Segundo, California 90245**(Address of principal executive offices)

Registrant's  telephone number, including area code: **(310) 643-5300**Former name,  former address and former fiscal year, if changed since last report: **None**Name of each exchange on which registered: **None**Securities registered pursuant to Section 12(b) of the Act: **None**Securities registered pursuant to Section 12(g) of the Act: **Common Stock**

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   ̈ No x

Indicate by check mark  if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is  not contained herein, and will not be contained, to the best of registrant's  knowledge, in definitive proxy or information statements incorporated by reference  in Part III of this Form 10-K or any amendment to this Form 10-K. |_|

On July 30, 2004 the aggregate  market value of the voting stock held by non-affiliates of the Registrant was  approximately $16 million. The aggregate market value has been computed by reference  to the last trading price of the stock on July 30, 2004. On such date the Registrant  had 430,923,150 shares of common stock outstanding.

When used in this report,  the word "expects," "believes," "anticipates,"  and similar expressions are intended to identify forward-looking statements.  Such forward-looking statements include, but are not limited to, statements  regarding future events and the Company's plans and expectations. The Company's  actual results may differ significantly from the results discussed in forward-looking  statements as a result of certain factors, including those discussed in this  report. The Company expressly disclaims any obligations or undertaking to release  publicly any updates or revisions to any forward-looking statements contained  herein to reflect any change in the Company's expectations or any events, conditions  or circumstances on which any such statement is based. This Report includes  product names, trade names and marks of companies other than the Company. All  such company or product names are trademarks, registered trademarks, trade names  or marks of their respective owners and are not the property of the Company.

  

**TABLE  OF CONTENTS**

#  

|              |                                                                                                    |
|-------------------|---------------------------------------------------------------------------------------------------------|
| **PART      I**   |                                                                                                    |
|              | ITEM 1.      BUSINESS                                                                                   |
|              | ITEM 2.      PROPERTIES                                                                                 |
|              | ITEM 3.      LEGAL PROCEEDINGS                                                                          |
|              | ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |
|              | ITEM 5.      MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS                       |
|              | ITEM 6.      SELECTED FINANCIAL DATA                                                                    |
|              |                                                                                                    |
| **PART      II**  |                                                                                                    |
|              | ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS      OF OPERATIONS |
|              | ITEM 9.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                |
| **PART      III** |                                                                                                    |
|              | ITEM 10.      DIRECTORS AND OFFICERS OF THE COMPANY                                                     |
|              | ITEM 11.      EXECUTIVE COMPENSATION                                                                    |
|              | ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                            |
|              | ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                            |
|              |                                                                                                    |
| **PART      IV**  |                                                                                                    |
|              | ITEM 14.      FINANCIAL STATEMENTS, SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS                         |
|              |                                                                                                    |
|              | INDEX      TO EXHIBITS                                                                                  |
|              |                                                                                                    |
|              | CERTIFICATION                                                                                           |
|              |                                                                                                    |
|              | *Index      to Consolidated Financial Statements*                                                       |
|              |                                                                                                    |

# PART  I

## ITEM 1. BUSINESS

### A. Introduction and History

Aura Systems, Inc., a Delaware corporation,  ("Aura" or the "Company") designs, assembles and sells the  AuraGen®, the Company's patented mobile power generator that uses  the engine of a vehicle to generate power. It installs under-the-hood in many  motor vehicles and delivers on-location, plug-in electricity for any end use  including industrial, commercial, recreational and military applications. Compared  to the traditional solutions (i.e., GenSets and inverters) addressing the multi-billion  dollar North American mobile power market, the Company believes the AuraGen®  provides cleaner electricity with greater reliability and flexibility at a lower  cost to the end user. The Company began commercializing the AuraGen®  in late 1999 as a 5,000-watt 120/240V AC machine compatible with certain Chevrolet  engine models. In 2001, the Company added an 8,500 watt configuration and also  introduced AC/DC and Inverter Charger System (ICS) options. The Company now  has configurations available for more than 90 different engine types including  a majority of General Motors and Ford models, many Daimler Chrysler models and  numerous others made by Caterpillar, Detroit Diesel, Cummins, Freightliner and  Navistar, among other chassis and engine manufacturers. Within the past two  years a number of boats have had AuraGens installed; mainly for government end-users.

To date, AuraGen® units  have been sold to more than 500 customers in more than 10 industries, including  recreational, utilities, telecommunications, emergency/rescue, public works,  catering, oil and gas, transportation, government and the military. The Company's  objective is to be the leading developer and supplier of fully integrated mobile  electric power systems.

The Company was founded in 1987  and, until 1992, primarily engaged in supplying defense technology to classified  military programs. In 1992, the Company transitioned to being primarily a supplier  of consumer and industrial products and services using its developed technology.  In 1994, the Company founded NewCom, Inc., which sold and distributed computer  communications and sound products such as CD-ROMs and sound cards. In 1997,  the Company acquired MYS Corporation of Japan, a manufacturer of speaker systems.  NewCom ceased operations in 1999 and the Company experienced severe financial  hardship from this and other causes. In fiscal 2000, the Company sold MYS, the  Company's business divisions providing sound products, and other assets, restructured  substantial indebtedness and concentrated its focus on the AuraGen®  product.

The Company continues to hold several  patents, in addition to those related to the AurGen®, which it believes  provide the basis for economically viable products in addition to the AuraGen®,  but sales of the AuraGen® currently provide substantially all the  Company's operating revenues.

Early in its AuraGen®  program, the Company determined it was most cost-effective to outsource production  of components and subassemblies to volume-oriented manufacturers, rather than  produce these parts in house. As a result of this decision, and based on then  anticipated sales, the Company purchased, prior to fiscal 2001, a substantial  inventory of components at volume prices, most of which was then assembled into  finished AuraGen® units. Since sales did not meet such expectations,  the Company has been selling product from this inventory for several years.  These assembled units and components in inventory do not deteriorate with age  and require only minor applications of parts and labor to bring them to current  specifications. In fiscal 2002 and fiscal 2003, the Company substantially reduced  its internal staffing to be more appropriate to the slower-than-anticipated  level of sales. The Company has also suspended substantially all research and  development activities. The Company continued to downscale its operations in  fiscal 2004; however, the impact of the related cost reductions have been offset  by the costs of the Company's extremely weak financial condition, including  late fees, penalties and transaction costs incident to financial defaults.

### B. The AuraGen®

The AuraGen® is a patented  induction power system that uses the engine of a vehicle to produce electrical  energy. The AuraGen® can generate maximum power at engine RPM's from  enhanced idle to redline for gasoline engines and true idle to redline for larger  diesel engines. The Company believes the AuraGen® is the only proven,  commercialized power system available that can generate up to 8,500 watts of  clean power and is fully integrated under the hood of a vehicle. While traditional  mobile sources of electricity can exhibit voltage fluctuations, spikes, surges  and other inconsistencies, the AuraGen® delivers pure sine wave (or  "clean") power. Clean power is generally desired and often required  to safely and reliably operate highly sensitive digital equipment, such as computers,  communication and computer-controlled equipment.

The AuraGen® is composed  of three basic subsystems. The first subsystem is the generator that is bolted  to, and driven by, the vehicle's engine. The second subsystem is an electronic  control unit, which filters and conditions the electricity to provide clean,  steady voltages for both AC and DC power. The third subsystem is mounting brackets  and supporting components for installation and integration of the generator  with the vehicle engine.

The Company sells two basic models,  a 5 Kw and an 8.5 Kw, with a number of options. The models currently available  produce 5,000 watts of continuous power with 7,200 watts peak and 8,000 watts  of continuous power with 9,000 watts peak, respectively. AC output is in the  form of dual 120/240 volts pure sine wave at a frequency of 60 or 50 Hertz.  In addition, both of the above models are available in configurations that divide  the maximum power between AC and DC. The DC available power can be either 14  volts or 28 volts. In fiscal 2002, the Company introduced a new model that generates  power with the vehicle engine either on or off, using auxiliary batteries in  conjunction with the AuraGen®. Aura provides custom engineered brackets  for both the 5 Kw and the 8.5 Kw systems that attach to over 90 different engine  and chassis models. The Company also provides power-take-off (PTO) and hydraulic  driven interfaces for bigger trucks that do not involve direct attachment to  the vehicle engine.

### C. Mobile Power Industry

The mobile power generation market  is large and growing. Vehicles used in the telecommunications, utilities, public  works, construction, catering, and oil and gas industries, and emergency/rescue,  military and recreational vehicles rely heavily on mobile power for their internal  systems. In addition, mobile work sites require on-location electricity to power  equipment ranging from computers to power tools.

Based on studies conducted by the  U.S. government, Business Communications Company, Inc. ("BCC") and  others, the Company estimates the annual gross North American mobile power generation  market is at least $2.5 billion and growing. Worldwide growth is expected to  be fueled by increases in the development and construction of industrial infrastructures,  significant growth in homeland security expenditures, and increased use of sophisticated  electronic equipment in underdeveloped areas where grid-based electricity is  unavailable or unreliable. The Company believes that mobile power has become  increasingly important as backup to electric grid power supply.

The two primary options available  to users of mobile power today are GenSets and inverters. GenSets are relatively  inefficient power generation units which are not incorporated into a vehicle  and require external fuel, either gasoline or diesel, in order to generate electricity.  GenSets are generally noisy and cumbersome to transport because of their weight  and size. GenSet technology has been utilized since the 1930s. Inverters convert  the DC electricity stored in automotive or other batteries to AC electricity,  which is required by a wide range of mobile applications. Due to their low power  output capabilities, inverters are typically used for applications that require  less than 2,500 watts of power. Inverters do not generate their own power and  so the user must rely on batteries and recharge them by connecting into a grid  power source or through GenSets or other means.

The quality of electricity has become  more important as computers and other technologically advanced products have  become more widely available and utilized. Because GenSets usually do not deliver  pure sine wave electricity, they are not well suited for digital instruments  and sensors. Inverters that produce pure sine wave electricity are available  but are more expensive than standard inverters and relatively uncommon. The  Company has measured a less than 2.4% THD (total harmonic distortion) for the  electrical output from an AuraGen®, which compares favorably to the  output of that from a typical power company electric grid.

### D. Competitive Advantages  of the AuraGen®

The Company believes the AuraGen®  is a superior product due to its convenience, cost efficiency, fuel efficiency,  reliability, flexibility in power output, and the quality of the electricity  generated.

The Company believes the cost to  operate a typical GenSet is approximately $0.92 per kW hour and the cost to  operate a typical inverter is approximately $0.70 per kW hour. The cost to operate  a comparable AuraGen® is approximately $0.46 per kW hour while a  vehicle is stationary. When power is needed while the vehicle is in motion (e.g.,  recreational vehicles, ambulances, police vehicles, military vehicles), the  cost to operate the AuraGen® drops to approximately $0.28 per kW  hour.

The AuraGen® does not  require scheduled maintenance and is offered with a three year warranty compared  to the typical one year warranty available for a GenSet or inverter.

In addition, the AuraGen®  is significantly cleaner for the environment than the other generally available  mobile power solutions. The AuraGen® uses the automotive engine which  is highly regulated for environmental protection. GenSets use small engines  that produce significantly higher levels of emissions per unit of power output  than the automobile engine.

The Company believes that barriers  to entry make it less likely that a product superior to the AuraGen®  will become available in the foreseeable future. The inventions upon which the  AuraGen® is based are protected by patents issued in the U.S. and  key foreign countries. Creating and patenting the AuraGen® required  over $150 million and 600 man-years of engineering, research and development.  To Aura's knowledge, there are no other patents to this technology. Manufacturers  and end users of mobile power solutions (including the military) typically require  completion of extensive evaluation and approval processes before embracing new  systems. Many large target customers, including GM, Ford and Daimler Chrysler,  have already invested the time and capital required to evaluate and test the  AuraGen®. In addition, after extensive testing, a number of Federal,  state and local government departments, utilities and major industrial companies  have approved the AuraGen® for purchase.

Thousands of AuraGen®  units are currently being used for multiple applications and in all types of  operating environments, providing a good sample set for reliability analysis.  The results show very low failure rates, which the Company is reducing via minor  hardware and software modifications, better assembly procedures and improved  installation training. The U.S. Army has performed its own tests and is continuing  to test the AuraGen® under severe conditions. The VIPER (the name  for the military version of the AuraGen®), now in use by Special  Operations and other combat forces, has been air-drop-certified by the Army  and has been successfully deployed in Operation Enduring Freedom and Operation  Iraqi Freedom. 

The AuraGen® system received  UL listing in 2002 and 2003. UL listing is important - if not required - in  order to be able to sell the AuraGen® to the RV and marine recreational  market. The Company has established a Quality Management System and has achieved  ISO 9001:2000 registration.

### E. Target Markets

The Company has identified the following  target markets:

*Military, Homeland Security Administration  and Other Federal Agencies*

The Company believes the VIPER (the  military version of the AuraGen®) is a superior mobile power solution  compared with alternatives for numerous military applications. Producing quiet,  clean power from vehicles at low engine speed is important to the military as  the military increases its reliance on sophisticated electronic systems and  strives to enhance its mobility and transportability by shedding weight and  space. Special Operations, Airborne, Communications, Corps Support, Marine  Corps, Navy and Coast Guard units use the VIPER today. Other Federal agencies,  such as the FBI, use the AuraGen. The Company received a contract from the Army  during it fiscal 2004 under a Federal fiscal 2004 budget line item to improve  system elements, conduct an operational field evaluation with several Army Commands,  and test and qualify the VIPER as an approved system kit. In addition, the  fiscal 2005 Defense Budget includes $3,000,000 of funding for VIPERs. 

Utilities and the telecommunications  industry regularly use mobile power in their daily activities. Several utilities  in the U.S. have purchased the AuraGen® system and continue evaluating  the product. The AuraGen® is also used by several television broadcast  stations.

The emergency/rescue market relies  heavily upon mobile power for lights, communications gear, instruments, medical  equipment and digital equipment and tools. As the emergency/rescue market has  undergone a transition to digital equipment and portable computers, it has experienced  constant growth in mobile power needs. Approximately 20 organizations have started  to use the AuraGen®.

The public works and construction  market comprises a large number of municipalities and construction companies  that use portable power for their projects. Approximately 35 municipalities  are using the AuraGen® in limited quantities in their service and  work trucks. The oil and gas industry has a substantial need for mobile power  and has traditionally used GenSets. The Company believes the AuraGen®  provides a substantially better product for the industry's need.

Electric power is a critical need  in RV's. The AuraGen® offers significant benefits to RV users. These  benefits include first and foremost the convenience of residential feel (no  need to "shed" loads, no noise, ability to use standard home appliances),  fuel savings (the AuraGen® uses only the RV engine), reduced maintenance  costs (no required scheduled maintenance) and no power derating due to altitude  or temperature.

The Company has begun to explore  the use of the AuraGen® in marine applications. Initial study and  field experience indicate that this is a potentially excellent market for the  AuraGen®. The AuraGen® has demonstrated remarkable durability  in marine environmental conditions. Its significant weight and space savings  make it attractive to this industry compared to heavy and noisy Gensets.

### F. Company Facility, Manufacturing  Process and Company Suppliers

Aura assembles and tests the AuraGen®  at the Company's 68,000 square foot facility in El Segundo, California with  components which are produced by various suppliers. The Company established  these facilities with a maximum production capacity of 5,000 units per month  per 8 hour operating shift. The facility is currently substantially under-utilized  and the Company is evaluating the possibility of relocating to a smaller facility.

Early in its AuraGen®  program, the Company determined it was most cost-effective to outsource production  of components and subassemblies to volume-oriented manufacturers, rather than  produce these parts in house. As a result of this decision, and based on then  anticipated sales, the Company purchased, prior to fiscal 2001, a substantial  inventory of components at volume prices, most of which was then assembled into  finished AuraGen® units. Since sales did not meet such expectations,  the Company has been selling product from this inventory for several years.  It is important to note that these assembled units and components in inventory  do not deteriorate with age and that even though there have been improvements  and modifications to the AuraGen® product over this period, the units  in inventory require only minor applications of parts and labor to bring them  to current specifications. From fiscal 2002 through fiscal 2004, the Company  substantially reduced its internal staffing to be more appropriate to the slower-than-anticipated  level of sales. The Company has also suspended substantially all research and  development activities.

To ensure quality and reliability  in the field, the Company uses highly qualified suppliers, the majority of which  are ISO 9002 compliant, and performs qualification testing on the AuraGen®  hardware components, the electronic control unit, all software and on fully  installed in-vehicle systems.

The Company has sold a minority  interest in its Aura Realty, Inc. subsidiary, which owns the El Segundo facility  and leases it to the Company. See the discussion under Item 7. - Liquidity and  Capital Resources.

### G. Distribution and Product  Support

Aura provides a turnkey product  and service to support the Company's customers in every area. The Company has  performed all of the development, from basic physics to detailed engineering.  The Company believes its core capabilities provide a solid foundation to resolve  technical issues, develop an ongoing line of new products and continually enhance  the Company's products.

The Company's vehicle integration  team develops, engineers and supplies all of the brackets, pulleys, idlers,  belts, tensioners and other components that comprise a mounting system. The  group also specifies all of the requirements of the AuraGen® to allow  its use with other mobile drives, such as hydraulic systems and Power Take Off  ("PTO") applictions.

### H. Certain Risk Factors

**Risk Factors Relating to the  Company**

The Company has a history of  losses and the Company may not be profitable in any future period.

In each fiscal year since organization  in 1987, the Company has incurred a loss. The Company has an accumulated deficit  in retained earnings of approximately $316.9 million from its inception through  February 29, 2004. There can be no assurance that the Company will be able to  achieve or maintain profitability or positive cash flow.

The Company requires additional  capital, and there is no assurance that it will be available.

The Company requires additional  debt or equity financing to fund ongoing operations. In May and June 2004, the  Company reached nonbinding agreements in principle with a number of parties  that, if consummated, resolve the Company's monetary defaults on its headquarters  mortgage, settle certain litigation involving the Company and former management  of the Company, provide for additional equity at closing, provide for conversion  to equity of existing secured debt and provide for changes in the Company's  senior management and Board of Directors (together, the "2004 Recapitalization  Transactions"). Management believes that following completion of the 2004 Recapitalization  Transactions, including receipt of funding, the Company will have a more stable  financial condition. Even if the 2004 Recapitalization Transactions are completed  as anticipated, the Company will continue to require forbearance of several  creditors and may require additional financing in the next twelve months as  it seeks to increase its sales. **Completion of such agreements would  substantially dilute the interests of existing stockholders, reducing by at  least one-half their proportional interest in the Company. In the event the  agreements are not consummated, it is likely that the Company would need to  file for bankruptcy protection.

The Company is seeking to raise  additional capital; however, the Company has no firm commitments from third  parties other than those involved in the 2004 Recapitalization Transactions  to provide additional financing and there can be no assurance that financing  will be available at the times or in the amounts required. The issuance of additional  shares of equity in connection with such financing could dilute the interests  of existing stockholders of the Company, and such dilution could be substantial.  The Company must increase its authorized shares in order to be able to sell  common equity, and intends to propose to stockholders such action as well as  a reverse stock split of its common shares; there can be no assurance that either  such action will be approved. If financing cannot be arranged in the amounts  and at the times required, the Company will cease operations. See Item 7. -  Liquidity and Capital Resources.

The Company is in default of  its financial obligations.

Due to the Company's acute liquidity  challenges, it has defaulted in payments under many of its financial obligations  (see Item 7. - Liquidity and Capital Resources and Note 9 in the Consolidated  Financial Statements). These defaults effectively render these obligations payable  on demand and the entire principal balance of each obligation has been included  in current liabilities in the accompanying Consolidated Financial Statements.  The defaults increase the Company's costs as a result of penalties, late fees  and transaction costs. Actions by the parties to these obligations to enforce  their rights to collect the amounts due could require the Company to cease operations.

The Company may be required to  file for bankruptcy.

Until the Company can achieve positive  cash flow from operations, it relies on continued infusions of capital to continue  operations. In the event such capital is not provided in the amounts or at  the times required, the Company would be required to file for bankruptcy.

The Company has granted substantial  rights to its primary secured creditor.

The Company has obtained funding  necessary to continue operations through the issuance of 10% convertible secured  notes, of which $5,775,973 principal amount were outstanding as of February  29, 2004. As amended in April 2004, the notes contain a 15% payment premium  and are convertible at the option of the holder at a 15% discount into any debt  or equity financing completed by the Company. The notes are secured by substantially  all the assets of the Company, including its intellectual property. A substantial  majority of the notes are held by two lenders who may be deemed to be under  common control. Although the notes do not expressly require such consent, management  of the Company believes the terms of such notes may effectively require the  Company to obtain the consent of such lenders to any future financing or other  significant transaction.

The Company must amend its Articles  of Incorporation to increase its shares of authorized common stock.

The Company's authorized capital  consists of 500,000,000 shares of common stock and 10,000,000 shares of preferred  stock. At July 30, 2004, there were 430,923,150 shares of common stock outstanding  and approximately 220,000,000 shares of common stock reserved or committed for  future issuances under outstanding options, warrants and rights and upon conversion  of Preferred Stock. As of July 30, 2004, 591,110 shares of preferred stock were  outstanding all of which were Series A Convertible Redeemable Preferred. The  2004 Recapitalization Transactions also contemplates the issuance of a significant  number of shares of Series B Convertible Preferred stock. The Company intends  to seek authorization from its shareholders to increase its authorized common  stock and/or to implement a reverse stock split sufficient to address all shares  currently reserved or committed for future issuances and allow for additional  equity investments in the future; however, there can be no assurance that any  such proposal will be approved by the Company's shareholders and effected. For  a further discussion see Item 7. - Liquidity and Capital Resources.

Any issuance of shares may dilute  existing shareholders. 

The issuance of shares of common  or preferred stock will dilute the interests of existing stockholders and may  cause a decline in the net book value of a share of stock. Completion of the  pending 2004 Recapitalization Transactions would substantially dilute the interests  of existing stockholders, reducing by at least one-half their proportional interest  in the Company. The Company cannot predict the price at which it may issue  additional shares of common stock. Although the Company will seek to obtain  maximum consideration for any issuance of shares, in order to attract necessary  new capital, the Company may sell shares of stock at a discount to market prices.

The Company has considered implementing  a reverse stock split, which may adversely affect the market for the common  stock.

Although a reverse stock split would  be intended, in part, to increase the trading price of the Company's common  stock, there cannot be any assurance that such price would in fact increase  following a reverse stock split. In order for the market value of each shareholder's  interest in the Company to remain the same following a reverse split, the price  of the stock would need to increase by the mathematical ratio of the split (for  example, if a one-for-two reverse split is adopted, the trading price of the  stock would need to double in order for the market value of each shareholder's  interest to remain constant). Although a reverse split would be intended to  increase shareholder values over time, companies effecting reverse splits generally  experience a short-term decline in shareholder values, as the stock price does  not immediately increase proportionately to the ratio of the split. 

Aura's revenues have declined  significantly in recent years.

The Company has experienced a significant  decline in operating revenues since fiscal 1998. A significant subsidiary (NewCom)  ceased operations in fiscal 1999 and the Company has sold operating divisions  and subsidiaries not related to the AuraGen® to raise cash. The Company's  net revenues peaked at approximately $104 million in the fiscal year ended February  28, 1998. Revenues related to the Company's current product, the AuraGen®,  have fluctuated over the last four years (see Item 7. - Overview). Revenues  for each fiscal year since fiscal 1999 were as follows:

| Fiscal        Year | Operating        Revenue        (in millions) |
|--------------------|-----------------------------------------------|
| 1999               | $53.7                                         |
| 2000               | 5.8                                           |
| 2001               | 2.5                                           |
| 2002               | 3.1                                           |
| 2003               | 1.1                                           |
| 2004               | 1.9                                           |

The Securities and Exchange Commission  Has Brought an Action Against the Company 

In June 2002, the Securities and  Exchange Commission ("SEC") brought a civil action against the Company,  NewCom (a former subsidiary of Aura), and certain former members of the Company's  management team, including Zvi (Harry) Kurtzman and Steven Veen, for violations  of the antifraud and books and records provisions of the securities laws. The  complaint relates to the financial statements for various transactions during  fiscal years 1996 through 1999. A related action was brought against Gerald  Papazian. Without admitting or denying the allegations in the complaint, the  Company as well as the former officers filed consents agreeing to settle the  case. The Company consented to a permanent injunction against violations of  the securities laws, with no penalty imposed based on the Company's financial  condition. See Item 3. - Securities and Exchange Commission.

The Company has substantially  reduced its management staffing.

As a result of the Company's historical  losses, the SEC investigation that culminated in the resignation of the Company's  prior senior management under Zvi (Harry) Kurtzman and other factors, the Company  is in a weak financial condition. This has resulted in a substantial downsizing  of the Company's senior management. 

The Company's current Chief Operating  Officer has been employed by the Company for over nine years. The Company's  current Chief Executive Officer commutes and telecommutes to the Company's headquarters.  The Company's Interim Chief Financial Officer recently resigned, prior to which  he also telecommuted and served on a part-time basis. Both such officers are  paid at substantially lower rates than the rates at which their predecessors  were paid. The Company believes these arrangements are reasonable under the  circumstances and more advantageous to the Company than other available alternatives.

For a further discussion, see Item  10.

The success of the Company over  the short-term depends on the commercial success of the AuraGen®  products, as the Company is not currently engaged in any other line of business.

Because the Company has focused  its business on developing a single product line, rather than on diversifying  into other areas, the Company's success in the foreseeable future will be dependent  upon the commercial success of the AuraGen® product line.

**Risk Factors Relating to the  AuraGen®**

The market acceptance of the  AuraGen® is uncertain.

Aura's business is dependent upon  sales generated from the AuraGen® family of products and increasing  acceptance of the product. The AuraGen® uses new technology and has  only been available in the marketplace for a few years. The Company's financial  condition has limited its ability to promote the AuraGen® and make  potential customers aware of its existence. Because the Company's product is  radically different from traditionally available mobile power solutions, users  may require lengthy evaluation periods in order to gain confidence in the product.  Original equipment manufacturers ("OEMs") and large fleet users also  typically require considerable time to make changes to their planning and production.  Distributors used by the Company may not focus adequate resources on selling  the Company's products or may otherwise be unsuccessful.

There can be no assurances that  the Company's products will achieve broad acceptance in the marketplace.

Aura's business may be adversely  affected by industry competition.

The industry in which the Company  operates is competitive. The primary competition for the AuraGen®  is GenSets and there are approximately 44 GenSet manufacturers in the United  States.

Many of the Company's competitors  have greater financial resources, have larger budgets for research, new product  development and marketing and have long-standing customer relationships. The  Company must compete with many larger and more established companies in the  hiring and retention of qualified personnel.

The Company depends on its patented  technology.

The Company relies on a number of  patents and patent applications to protect the AuraGen® products  from unauthorized competitors. The Company cannot provide assurance that the  patents pending relating to the AuraGen® system or future patent  applications will be issued or that any issued patents will not be invalidated,  circumvented or challenged. A portion of the Company's proprietary technology  depends upon unpatented trade secrets and know-how.

The Company may not be able to  effectively manage its turnaround and growth.

The Company restructured its operation  during fiscal 2003 and 2004 in order to conserve cash. The Company's workforce  has declined steadily from 101 employees as of February 28, 2002 to 60 at February  28, 2003 to 49 at February 29, 2004. The Company will need to hire employees  and rebuild its sales and production infrastructure in order to service any  significant growth in demand for its products, which growth is critical to the  Company's success. There can be no assurance that, with the Company's reduced  staffing, it will be able to effectively respond to significant increases in  product sales.

The Company has depended on the  expertise of key employees.

Because the Company's product depends  on patented and proprietary technology and must be periodically modified to  adapt the product to changes in engine design and manufacture, the Company depends  on a limited number of key employees with experience in electromagnetic theory  and design. In order to conserve cash, the Company has furloughed or terminated  a number of its employees in fiscal 2003 and fiscal 2004. 

The Company depends on third  party manufacturers for certain product components.

The Company relies extensively on  subcontracts with third parties for the manufacture of most components of the  AuraGen®. The use of third party manufacturers increases the risk  of delay of shipments to the Company's customers and increases the risk of higher  costs if the Company's third party manufacturers cannot make components available  when required.

Some of these components are currently  available only from a single source or from limited sources. The Company may  experience delays in production of the AuraGen® if it fails to identify  alternate vendors or if any parts supply is interrupted or reduced, or if there  is a significant increase in production costs or decline in component quality.

The Company will need to renew  sources of supply to meet increases in demand for the AuraGen®.

The Company purchased the basic  components for the AuraGen® units currently being sold under a bulk  order placed prior to fiscal 2001. Due to sales not meeting anticipated levels,  the Company has been selling from this inventory. In order to renew this inventory,  the Company will need to renew contracts with such manufacturers or locate other  suitable manufacturers. Although the Company believes that there are a number  of potential manufacturers of the components, there can be no assurance that  renewed contracts for components can be obtained on favorable terms. Any material  adverse change in such contracts could increase the Company's cost of goods.

### I. Aura's Other Technologies

Aura retains significant interest  in two other technology applications, electromagnetic actuators and actuated  mirror array. Although the Company has suspended its prior efforts to develop  a commercially viable product using either of these technologies, the Company  intends to revive such efforts in the future. Significant capital will be required  to continue such efforts; accordingly, the Company cannot predict when its financial  condition will allow such efforts to resume.

The Company developed its Electromagnetic  Valve Actuator to fill the performance gap between linear actuators and solenoids.  To date, the principal application of this actuator has been in its Electromagnetic  Valve Actuator System ("EVA(TM)"), a patented electro-magnetically  powered system that opens and closes engine valves at any user specified time  interval. The EVA(TM) can thereby, for instance, replace the mechanical  camshaft on an engine. Computer control of the valve timing has potentially  material benefits to engine performance, fuel economy and emissions.

Aura developed and patented a technology  (a "light valve") for generation of images called the Actuated Mirror  Array (AMA(TM)). The AMA(TM) utilizes an array of micro actuators  in order to control tiny mirrors whose position change is used to cause a variation  in intensity. The Company believes that this device could have a major impact  on applications where light efficiency is paramount, such as in large screen  television, movie and exhibition displays, and the testing of electro-optical  devices for military or civilian use.

The Company entered into a license  and manufacturing agreement with Daewoo Electronics Co., Ltd. ("Daewoo")  to manufacture televisions and other devices based on AMA(TM) technology.  Daewoo invested substantial funds to commercialize the technology; however,  Daewoo has since ceased operations due to bankruptcy.

### J. Research and Development

During the fiscal year ended February  29, 2004, the Company's expenditures for research and development ("R&D")  activities were negligible. During the fiscal years ended February 28, 2003  and 2002, the Company spent approximately $0.4 million and $0.8 million, respectively,  on R&D activities. The Company believes that ongoing R&D are important  to the success of the Company's product in order to utilize the most recent  technology, to develop additional products and additional uses for existing  products, and to stay current with changes in vehicle manufacture and design  and to maintain an ongoing advantage over potential competition. The Company's  financial condition does not currently allow significant expenditures on R&D  as all costs are being minimized while the Company seeks to maintain solvency  and attain profitability.

### K. Patents and Intellectual  Property

The U.S. Patent Office has awarded  the Company 29 patents applicable to automotive and industrial applications.  Of the above patents, two are focused directly on the AuraGen®, nine  are for basic magnetic actuation, two are for control systems associated with  controlling the magnetic fields in different configurations and sixteen are  focused on the EVA(TM) application. In addition, the Company has two  patent applications pending related to its AuraGen® technology. The  first of Aura's domestic patents does not expire until 2015. The Company intends  to defend its patents vigorously.

There are two ways that electromagnetic  technology can be used for generators, motors and actuators. One method uses  permanent magnets, while the other uses electromagnets. The Company is building  and selling the AuraGen® product with the imbedded magnetic technology  covered in the two AuraGen® patents using electromagnets. The nine  additional basic actuation patents cover designs where rare earth magnets could  potentially be used to build similar machines.

The Company has an additional 18  patents in electro-optical technology and a number of other patents in other  fields.

### L. Employees

As of February 28, 2004, the Company  employed 49 persons. The Company has reduced its workforce significantly in  the past two years to conserve cash. The Company is not a party to any collective  bargaining agreements.

### M. Significant Customers

The Company sold its AuraGen®  product to three significant customer during fiscal 2004 for a total of approximately  $1.1 million or 58% of net revenues.

## ITEM 2. PROPERTIES

The Company's subsidiary, Aura Realty,  Inc., owns the 47,000 square foot headquarters facility and adjacent 27,690  square foot manufacturing facility in El Segundo, California that the Company  uses for its AuraGen® product. These properties are encumbered by  a deed of trust securing a note in the original principal amount of $5.4 million.

During fiscal 2003, the Company  sold a minority interest in Aura Realty, Inc. During fiscal 2004, the Company  defaulted in its payments under the note secured by its headquarters and manufacturing  facilities. Such default continued past year-end and the lender had taken actions  regarding a possible foreclosure sale. In June 2004, the Company paid all arrearages,  cured this default and is now current on its obligations under the note. ****See  the discussion under Item 7. - Liquidity and Capital Resources.

## ITEM 3. LEGAL PROCEEDINGS

Due to the Company's acute liquidity  challenges, it has defaulted in payments under many of its financial obligations  (see Item 7. - Liquidity and Capital Resources and Note [**x**] in the Consolidated  Financial Statements). These defaults effectively render these obligations payable  on demand and the entire principal balance of each obligation has been included  in current liabilities in the accompanying Consolidated Financial Statements.  The Company is engaged in numerous legal actions by creditors seeking payment  of sums owed. Actions by the parties to these obligations to enforce their rights  to collect the amounts due could require the Company to cease operations.

### Securities and Exchange  Commission

In June 2002, the Securities and  Exchange Commission ("SEC") brought a civil action against the Company,  NewCom (a former subsidiary of Aura), and certain former members of the Company's  management team, including Zvi (Harry) Kurtzman (the Company's former Chief  Executive Officer) and Steven Veen (the Company's former Chief Financial Officer),  for violations of the antifraud and books and records provisions of the securities  laws. The complaint relates to the financial statements for various transactions  during fiscal years 1996 through 1999. The Company originally disclosed the  investigation by press release in January 1999. The SEC brought a related action  against Gerald Papazian (the Company's former President). Without admitting  or denying the allegations in the complaint, the Company as well as the former  officers filed consents agreeing to settle the case. The Company consented to  a permanent injunction against violations of specified sections of the securities  laws, with no penalty imposed based on the Company's financial condition. Mr.  Kurtzman consented to a permanent injunction against violations of specified  sections of the securities laws, a $75,000 civil penalty and a permanent bar  from serving as an officer or director of a publicly-traded company. Mr. Veen  consented to a permanent injunction against violations of specified sections  of the securities laws, a $50,000 civil penalty and a five-year suspension from  appearing or practicing before the SEC. Mr. Papazian consented to a permanent  injunction against violations of specified sections of the securities laws and  a $25,000 civil penalty.

In September 2002, a federal grand  jury indicted three officers of NewCom, including Mr. Veen, on various conspiracy  and fraud charges related to NewCom's financial statements.This matter was  brought to trial in 2003 and Mr. Veen was acquitted of all charges.

### Barovich/Chiau et. al.  v. Aura Systems, Inc. et. al. (Case No. CV -95-3295).

As previously reported in its fiscal  2000 report on Form 10K, the Company settled shareholder litigation in the referenced  matter in January 1999. On November 20, 1999, the parties entered into an Amended  Stipulation of

Settlement, providing that the Company  make payment of $2,260,000 (plus interest) in thirty-six equal monthly installments  of $70,350. On October 22, 2002, after the Company had failed to make certain  monthly payments, Plaintiffs applied for and obtained a judgment against the  Company for $935,350, representing the balance due with respect to the original  principal amount of $2,260,000. The Company has subsequently made only two monthly  payments of $70,350 each, reducing the amount owed to $794,650 (plus interest).  In early fiscal 2004, the Plaintiffs took further legal actions to enforce the  October 2002 judgment, culminating in a lien on one of the Company's smaller  bank accounts. The Company has made appropriate provisions in its financial  statements to fully reflect this liability.

### Frankston v. Aura Systems,  Inc., et. al. (CV 91-6232 LGB).

In 1991, Michael Frankston brought  the referenced civil action in the United States District Court for the Central  District of California against the Company, its founding management members  who are no longer employees of the Company, and two of its former subsidiaries.  The Company, following an appeal, paid to Mr. Frankston its portion of the judgment  in full. In December 2002, Mr. Frankston received a court order amending the  judgments to make the Company liable for the damages awarded against the former  subsidiaries. In February 2003, the Company paid $212,444 to Mr. Frankston representing  the final settlement in this matter.

### Waltco Engineering Co.  v. Aura Systems, Inc. et. al. (YC045396).

On December 11, 2002, Plaintiff,  Waltco Engineering Co. ("Waltco"), filed a suit in California Superior  Court for Breach of Written Agreement against the Company and related common  counts. Waltco asserted that the Company breached the terms of a payment plan.  Waltco claimed damages of $283,296.41 and received a summary judgment for that  amount plus costs. During fiscal 2004, the Company negotiated an agreement with  Waltco under which the Company would make two payments of $125,000 each in full  settlement of this judgment. The Company was not able to fund the second of  these payments and negotiated an amendment to the agreement calling for monthly  payments until the remaining $125,000 has been paid in full. As of July 30,  2004, the Company was current on those payments. The Company has made appropriate  provisions in its financial statements to fully reflect its estimated liability  in this case.

### Former Management  Suits

During fiscal 2004, a group of former  officers of the Company (the "Former Officers"), who resigned on February  28, 2002 following the commencement of an SEC investigation into the Company's  accounting practices (as described above), filed a number of lawsuits against  the Company. A description of each suit is set forth below.

These Former Officers are expected  to participate in the 2004 Recapitalization Transactions and settlement of these  suits is contemplated within these transactions (see Item 7 - Liquidity and  Capital Resources). There can be no assurance that the 2004 Recapitalization  Transactions will be completed and that these suits with thereby be resolved.

On July 23, 2003, the Former Officers  filed a lawsuit against the Company seeking payment of amounts owed under a  consulting arrangement. The Company had renegotiated the amounts payable under  the consulting arrangement, but defaulted on such payments. The suit seeks full  payment based on their original employment agreements, which had been revised  and replaced prior to their resignations. The accruals reflected on the Company's  financial statements were based on the revised agreements and, should these  former officers be awarded the full amount sought in this suit, the Company  would be required to record additional expense of approximately $1,100,000.  

*Zvi Kurtzman,  et al v. Aura Systems, Inc.*

On February 8, 2004, the Former  Officers, along with other plaintiffs, filed a lawsuit alleging, among other  things, breach of contract and fraud. At issue were shares of the Company's  common stock that were to be issued to the Former Officers and the other plaintiffs  as a penalty for the Company's failure to register certain shares of common  stock purchased in calendar 2002 (the "Penalty Shares"). The Company  has reflected the obligation to issue the Penalty Shares on its balance sheet  at February 29, 2004. 

*Zvi Kurtzman  v. Aura Systems, Inc.*

On May 22, 2003, Kurtzman, a member  of Former Management, filed a "Petition for Writ of Mandamus" requesting  access to the Company's books and records as a shareholder of the Company (the  "Petition"). The Petition was dismissed on May 20, 2004; 

### Foreclosure Proceeding    

On or about September 25, 2003,  the Company was notified that the holder of the deed of trust on the Company's headquarters  facility had begun foreclosure proceedings for nonpayment of the mortgage.   The notice states that the mortgagor may sell the property if the Company does  not pay all past due payments plus permitted costs, which the notice states  totaled $479,828.31 as of September 8, 2003.  Penalty interest and late  charges accrue at the rate of approximately $42,000 per month.  Due to  the defaults on the mortgage, the entire mortgage has been classified as a current  payable on the Company's financial statements.   The loss of the Company's  headquarters facility, without relocation of the Company, would cause the Company  to cease operations.  

The Company had been addressing  this situation through making monthly payments equal to the required monthly  payment under the mortgage plus an additional amount to reduce the arrearages.  The Company had engaged in discussions with the mortgagor and indicated its  intention to cure the unpaid amounts. On January 22, 2004, the Company received  notice that a foreclosure sale of the property had been scheduled. Through  negotiation and additional payments against the default amounts owed, this sale  was postponed several times. On June 18, 2004, the Company made sufficient  payments to cure the defaults and the pending foreclosure has been withdrawn.

The defaults under the mortgage  also resulted in defaults in the Agreement for Sale and Leaseback (the "Sale/Leaseback  Agreement") under which the Company sold a minority interest in and intended  to sell the entirety of its Aura Realty subsidiary, which owns the buildings  subject to this mortgage (see Item 7 -Liquidity and Capital Resources). In  its efforts to address the defaults under the mortgage and the Sale/Leaseback  Agreement, the Company undertook efforts to sell these buildings and, if necessary,  move its headquarters and processing facilities to a new location. In May 2004,  the Company entered into an agreement under which it would sell the buildings  subject to this mortgage, use the proceeds to substantially buy out the holders  of the minority interest in Aura Realty (the "Realty Minority Shareholders")  arising from the Sale/Leaseback Agreement and terminate its obligations thereunder  and leaseback one of the buildings and a portion of the other (see discussion  of 2004 Recapitalization Transactions in Item 7 - Liquidity and Capital Resources).  In June 2004, the Realty Minority Shareholders sent notice to the Company that  it had defaulted on the May 2004 agreement as it pertained to the Realty Minority  Shareholders and terminated the agreement. The Company has continued negotiations  with the Realty Minority Shareholders since that date but has not yet been successful  in getting them to recommit to the terms of the May 2004 agreement or any other  settlement. Such an agreement with the Realty Minority Shareholders is a condition  precedent to the buyer's obligation to complete the purchase of the buildings.  There can be no assurance that the Company will be able to obtain an agreement  with the Realty Minority Shareholders or complete the 2004 Recapitalizaton Transactions.  

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

No matters were submitted to a vote  of shareholders in the fourth quarter of fiscal 2004.

# PART II

## ITEM 5. MARKET  FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

From May 21, 1991, to July 21, 1999,  Aura's common stock was listed on the NASDAQ National Stock Market. The shares  were delisted from the NASDAQ National Market as a result of the Company's failure  to meet the minimum $1.00 bid price and other requirements. On February 1, 2001,  the Company's shares were listed on the OTC Bulletin Board under the symbol  "AURA". From June through August 2003, as a result of its inability  to timely file its Form 10-K for fiscal 2003, the Company's trading symbol on  the OTC Bulletin Board was changed to "AURAE", and the common stock  continued to be listed. There can be no assurance that the common stock will  continue to trade on the OTC Bulletin Board.

Sets forth below are high and low  sales prices for the common stock of Aura for each quarterly period in the two  most recent fiscal years. Such quotations reflect inter-dealer prices, without  retail mark-up, markdown or commissions and may not necessarily represent actual  transactions in the common stock. The

Company had approximately 9,500  stockholders of record as of July 30, 2004.

| Period                                        | High   | Low    |
|-----------------------------------------------|--------|--------|
| ------                                        | -----  | -----  |
| Fiscal 2003                                   |        |        |
| First Quarter ended May 31,        2002       | $0.399 | $0.195 |
| Second Quarter ended August        31, 2002   | $0.180 | $0.072 |
| Third Quarter ended November        30, 2002  | $0.130 | $0.071 |
| Fourth Quarter ended February        28, 2003 | $0.135 | $0.059 |
|                                          |   |   |
| Fiscal 2004                                   |        |        |
| First Quarter ended May 31,        2003       | $0.104 | $0.057 |
| Second Quarter ended August        31, 2003   | $0.070 | $0.032 |
| Third Quarter ended November        30, 2003  | $0.130 | $0.055 |
| Fourth Quarter ended February        28, 2004 | $0.109 | $0.052 |

On July 30, 2004, the reported closing  sales price for the Company's common stock was $0.037.

### Dividend Policy

The Company has not paid any dividends  on its common stock and currently intends to retain any future earnings for  use in its business. The Company does not anticipate paying any dividends on  its common stock in the foreseeable future. During fiscal 2004, the Company  issued shares of Series A Convertible Redeemable Preferred Stock (the "Series  A Preferred") (see Item 7 - Liquidity and Capital Resources). Series A  Preferred earns cumulative dividends at a rate of 5% per annum based on its  stated $10.00 per share liquidation value. Dividends on Series A Preferred would  need to be paid before dividends could be paid on common stock.

### Changes in Securities  and Use of Proceeds

During the fourth quarter of fiscal  2004, the Company issued approximately $1.8 million principal of Intercreditor  Secured Debt in exchange for cash in a like amount to four entities, three of  whom each beneficially own more than 5% of the Company's outstanding stock.  See Item 7. - Liquidity and Capital Resources. Such issuances were exempt from  registration pursuant to section 4(2) of the Securities Act of 1933 as private  placements to a limited number of accredited investors.

## ITEM 6. SELECTED  FINANCIAL DATA

The following Selected Financial  Data has been taken or derived from the audited consolidated financial statements  of the Company and should be read in conjunction with and is qualified in its  entirety by the full-consolidated financial statements, related notes and other  information included elsewhere herein. 

AURA SYSTEMS, INC.  AND SUBSIDIARIES

|                                                                 | February        29,        2004 |  | February        28,        2003 |  | February        28,        2002 |  | February        28,        2001 |  | February        29,        2000 |
|----------------------------------------------------------------------|---------------------------------|--|---------------------------------|--|---------------------------------|--|---------------------------------|--|---------------------------------|
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Net      revenues                                                    | $        1,864,325              |  | $        1,103,770              |  | $        3,116,295              |  | $        2,512,508              |  | $        5,788,221              |
| Cost      of goods sold                                              | $        934,769                |  | $        571,099                |  | $        1,480,736              |  | $        1,216,637              |  | $        1,957,854              |
| Inventory      write down                                            | $        550,968                |  | $        -                      |  | $        1,510,871              |  | $        -                      |  | $        -                      |
| Gross      profit (loss)                                             | $        378,588                |  | $        532,671                |  | $        124,688                |  | $        1,295,871              |  | $        3,830,367              |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Expenses:                                                            |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Engineering,      research & development                         | $        2,135,061              |  | $        3,956,886              |  | $        9,224,376              |  | $        8,762,793              |  | $        11,614,892             |
| Selling,      general and administrative                             | $        7,191,925              |  | $        7,374,961              |  | $        10,006,844             |  | $12,695,833                     |  | $        10,725,397             |
| Class      action litigation & other legal settlements           | $        -                      |  | $        233,259                |  | $        (2,750,000)            |  | $        1,512,769              |  | $        427,091                |
| Adjustment      to accounts payable                                  | $        -                      |  | $        -                      |  | $        (651,685)              |  | $(1,046,324)                    |  | $        2,350,671              |
| Impairment      losses on long-lived assets                          | $        2,000,398              |  | $        2,300,000              |  | $        7,661,559              |  | $        -                      |  | $        -                      |
| Severance      expense                                               | $        -                      |  | $        241,243                |  | $        1,080,525              |  | $        -                      |  | $        -                      |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Total      expenses                                                  | $        11,327,384             |  | $        14,106,349             |  | $        24,571,619             |  | $        21,925,071             |  | $        25,118,051             |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Loss      from operations                                            | $(10,948,796)                   |  | $        (13,573,678)           |  | $(24,446,931)                   |  | $(20,629,200)                   |  | $(21,287,684)                   |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Other      (income) and expense:                                     |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Impairment      of investments                                       | $        500,000                |  | $        818,019                |  | $        1,433,835              |  | $ 240,000                       |  | $        -                      |
| Loss on sale of minority interest in Aura Realty                     | $        231,000                |  | $ 626,676                       |  | $ -                             |  | $        -                      |  | $        -                      |
| (Gain) loss on sale of investments                                   | $        (201,061)              |  | $        -                      |  | $        -                      |  | $        -                      |  | $        -                      |
| Interest expense                                                     | $        2,409,732              |  | $        2,656,592              |  | $        2,495,551              |  | $        2,263,916              |  | $        4,476,690              |
| Other                                                                | $        129,337                |  | $        (362,096)              |  | $ (535,179)                     |  | $ (446,399)                     |  | $ (1,454,641)                   |
| Provision      (benefit) for taxes                                   | $        -                      |  | $        -                      |  | $        (1,549,882)            |  | $        (2,203,145)            |  | $        (1,361,003)            |
| Minority      interest                                               | $        (365,514)              |  | $        14,018                 |  | $        -                      |  | $        -                      |  | $        -                      |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Loss      from continuing operations                                 | $(13,652,290)                   |  | $(17,326,687)                   |  | $(26,826,435)                   |  | $(20,929,971)                   |  | $(24,403,371)                   |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Discontinued      operations:                                        |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Loss      from discontinued operations, net of income taxes          | $        -                      |  | $        -                      |  | $        -                      |  | $        -                      |  | (4,131,501)                     |
| Extraordinary      Item                                              |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Gain      on extinguishment of debt obligations, net of income taxes | $        67,415                 |  | $        1,186,014              |  | $        1,889,540              |  | $        -                      |  | $        19,068,916             |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Net      loss                                                        | $(13,584,875)                   |  | $(16,140,873)                   |  | $(24,936,895)                   |  | $(20,929,971)                   |  | $        (9,465,956)            |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Net loss per common share                                            | $        (0.03)                 |  | $        (0.04)                 |  | $        (0.08)                 |  | $        (0.08)                 |  | $        (0.08)                 |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Loss from continuing operations per common share                     | $        (0.03)                 |  | $        (0.05)                 |  | $        (0.08)                 |  | $        (0.08)                 |  | $        (0.20)                 |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Loss from discontinued operations per common share                   | $        -                      |  | $        -                      |  | $        -                      |  | $        -                      |  | $        (0.03)                 |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Extraordinary income per common share                                | $        -                      |  | $        0.01                   |  | $        -                      |  | $        -                      |  | $        0.15                   |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Weighted average number of common shares                             | 430,923,150                     |  | 415,863,637                     |  | 327,587,590                     |  | 261,568,346                     |  | 124,294,051                     |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
|                                                                 |                                 |  |                                 |  |                                 |  |                                 |  |                                 |
| Working      capital                                                 | $(14,011,245)                   |  | $(15,626,271)                   |  | $        (2,512,553)            |  | $        (5,105,345)            |  | $        826,213                |
| Total      assets                                                    | $        17,760,733             |  | $        23,767,866             |  | $        28,761,990             |  | $        45,278,043             |  | $ 56,122,538                    |
| Total      debt                                                      | $        15,545,829             |  | $        13,345,378             |  | $        10,895,466             |  | $ 38,485,108                    |  | $        48,756,226             |
| Net      stockholders' equity (deficit)                              | $        (3,614,425)            |  | $        4,712,176              |  | $        12,652,733             |  | $        2,045,035              |  | $        1,516,008              |

## ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-K report may contain  forward-looking statements which involve risks and uncertainties. Such forward-looking  statements include, but are not limited to, statements regarding future events  and the Company's plans and expectations. The Company's actual results may differ  significantly from the results discussed in forward-looking statements as a  result of certain factors, including those discussed in the Company's Form 10-K  for the period ended February 29, 2004 and this report. The Company expressly  disclaims any obligations or undertaking to release publicly any updates or  revisions to any forward-looking statements contained herein to reflect any  change in the Company's expectations or any events, conditions or circumstances  on which any such statement is based. This report includes product names, trade  names and marks of companies other than the Company. All such company or product  names are trademarks, registered trademarks, trade names or marks of their respective  owners and are not the property of the Company. 

### Overview

Aura Systems, Inc., a Delaware corporation,  ("Aura" or the "Company") designs, assembles and sells the  AuraGen®, the Company's patented mobile power generator that uses  the engine of a vehicle to generate power. It installs under-the-hood in many  motor vehicles and delivers on-location, plug-in electricity for any end use  including industrial, commercial, recreational and military applications. The  Company began commercializing the AuraGen® in late 1999. To date,  AuraGen® units have been sold to more than 500 customers in more  than 10 industries, including recreational, utilities, telecommunications, emergency/rescue,  public works, catering, oil and gas, transportation, government and the military.  

The Company was founded in 1987  and, until 1992, primarily engaged in supplying defense technology to classified  military programs. In 1992 the Company transitioned to being primarily a supplier  of consumer and industrial products and services using its developed technology.  In 1994, the Company founded NewCom, Inc., which sold and distributed computer  communications and sound products such as CD-ROMs and sound cards. In 1997,  the Company acquired MYS Corporation of Japan, a manufacturer of speaker systems.  NewCom ceased operations in 1999 and the Company experienced severe financial  hardship from this and other causes. In fiscal 2000, the Company sold MYS, the  Company's business divisions providing sound products, and other assets, restructured  substantial indebtedness and concentrated its focus on the AuraGen®  product. Sales and support of the AuraGen® currently provide all  the Company's operating revenues.

The Company was set up for exponential  growth in sales of the AuraGen, which did not occur. In fiscal 2002 and fiscal  2003, the Company has substantially reduced its internal staffing to be more  appropriate to the slower-than-anticipated level of sales. The Company has also  suspended substantially all research and development activities. The Company  continued to downscale its operations in fiscal 2004; however cost reductions  have been offset by the costs of the Company's weak financial condition, including  late fees, penalties and transaction costs incident to financial defaults.

Since before fiscal 2002, the Company  has been in an extremely weak financial condition. The Company has depended  on repeated infusions of cash in order to maintain liquidity, as it has sought  to develop sales. Although end users, including military users, have been satisfied  with the Company's product, it has proved more difficult than the Company originally  anticipated to obtain broad market acceptance of its new technology. For more  than the last fiscal year, the Company has devoted substantial efforts to managing  its financial defaults, which condition has impeded its ability to grow sales.  The Company has also sought longer term funding that would allow it to capitalize  on the increasing acceptance of and appreciation for its product.

In June 2004, the Company reached  nonbinding agreements in principle with a number of parties that, when and if  consummated, resolve certain litigation involving the Company and former management  of the Company, resolve the Company's defaults on its pending sale and leaseback  of its headquarters facilities, set forth a schedule for the Company to obtain  longer term funding, and provide for changes in the Company's senior management  and Board of Directors. These agreements are referred to below as the "2004 Recapitalization Transactions" and are described further below, under "Liquidity  - The 2004 Recapitalization Transactions". Completion of the 2004 Recapitalization Transactions, including receipt of funding, will provide the Company a more stable  financial condition. The Company, however, will continue to require forbearance  of several creditors as it seeks to grow sales, and may require further financing  to remain solvent. **Completion of such agreements would substantially  dilute the interests of existing stockholders, reducing by at least one-half  their proportional interest in the Company. In the event the agreements are  not consummated, it is likely that the Company would need to file for bankruptcy  protection.

Early in its AuraGen®  program, the Company determined it was most cost-effective to outsource production  of components and subassemblies to volume-oriented manufacturers, rather than  produce these parts in house. As a result of this decision, and based on then  anticipated sales, the Company purchased, prior to fiscal 2001, a substantial  inventory of components at volume prices, most of which was then assembled into  finished AuraGen® units. Since sales did not meet such expectations,  the Company has been selling product from this inventory for several years.  These assembled units and components in inventory do not deteriorate with age  and require only minor applications of parts and labor to bring them to current  specifications. 

The Company's financial statements  have been prepared on the assumption the Company continues as a going concern,  which contemplates the realization of assets and satisfaction of liabilities  in the normal course of business. However, as a result of the Company's losses  from operations and its default on certain of its obligations (see Note 2 to  the Consolidated Financial Statements), there is substantial doubt about its  ability to continue as a going concern. The 2004 Recapitalization Transactions  are intended to provide the Company a firm financial base, however, there can  be no assurance that they will be consummated and it is likely that the Company  will need additional funding beyond the preliminary commitments the Company  has received. The consolidated financial statements do not include any adjustments  to reflect the possible future effects on the recoverability and classification  of assets or the amount and classification of liabilities that may result from  the possible inability of the Company to continue as a going concern. 

The Company's ability to continue  as a going concern is dependent upon the successful achievement of profitable  operations and the ability to generate sufficient cash from operations and financing  sources to meet the Company's obligations. In order to attract additional financing,  the Company expects that payment terms of its obligations will need to be restructured,  including resolution of the current defaults on many of its payment obligations.  There can be no assurance that such efforts will be successful.

The Company's current level of sales  reflects the Company's efforts to introduce a new product into the marketplace.  Many purchases of the product are being made for evaluation purposes. The Company  seeks to achieve profitable operations by obtaining market acceptance of the  AuraGen® as a competitive - if not superior - product providing mobile  power, thereby causing sales to increase dramatically to levels which support  a profitable operation. There can be no assurance that this success will be  achieved.

As of June 30, 2004, the Company  had outstanding warrants, options and convertible securities to purchase approximately  198 million shares of common stock. The Company also had commitments to issue  approximately 22 million shares of common Stock without further consideration.  The aggregate number of outstanding options, warrants, and common share equivalents  was in excess of the authorized, but unissued number of shares of the Company's  common stock. Management intends to seek shareholder approval of an increase  in the Company's authorized shares sufficient to satisfy all existing commitments,  the shares contemplated in the 2004 Recapitalization Transactions and create  available shares for potential future investments. However, there can be no  assurance that such approval will be obtained.

The Company proposes to issue shares  of a new series of preferred stock (the "Series B Preferred Stock") in the 2004 Recapitalization Transactions. Assuming the minimum subscriptions ($5.0 million)  are received and the conversion of $6.75 million of Intercreditor Secured Debt  (see "Liquidity - The 2004 Recapitalization Transactions"), the Company proposes  to issue shares of Series B Preferred Stock convertible into not less than 587  million shares of Common Stock at a price per common share of $0.02. In the  event the maximum subscriptions ($15.0 million) are received and the conversion  of $6.75 million of Intercreditor Indebtedness, the Company proposes to issue  shares of Series B Preferred Stock convertible into not less than 1,087 million  shares of Common Stock at a price per common share of $0.02. Such conversion  requires an increase in the Company's authorized shares of Common Stock. The  investors and holders of the Intercreditor Secured Debt would also be entitled  to receive warrants to purchase a number of additional shares of Common Stock  at a price of $0.02 per share. The number of warrants to be issued is 25% of  the number of shares obtainable upon conversion of the Series B Preferred Stock.  In order to provide sufficient shares of Common Stock for preexisting commitments  and to accommodate the maximum size of the proposed offering, the Company will  need to increase its authorized shares of Common Stock from 500 million to not  less than 2 billion and, upon completion of the 2004 Recapitalization Transactions,  existing shareholders will receive a proportionate dilution in their ownership  position in the Company.

### Results of Operations

The Company's fiscal 2004 net loss  was $13.6 million, and $7.0 million of that loss related to non-cash charges  for depreciation, amortization, asset impairments and beneficial conversion  of certain debt instruments. In fiscal 2003, the net loss was $16.1 million  and the similar non-cash charges were $5.6 million. In fiscal 2002, the net  loss was $24.9 million and similar non-cash charges were $15.0 million. Net  operating revenues and gross profit were $1.9 million and $0.4 million, respectively,  in fiscal 2004, $1.1 million and $0.5 million, respectively, in fiscal 2003  and $3.1 million and $0.1 million, respectively, in fiscal 2002.

### Revenues

Net revenues in fiscal 2004 increased  69% to $1.9 million due primarily to expanding direct sales to U.S. military  and governmental entities. The Company has not engaged in any significant pricing  reductions to generate sales volumes at these increased levels.

Net revenues in fiscal 2004 included  $0.11 million ($0.06 million in fiscal 2003) of revenues derived from services  related to the AuraGen® product. These services were generally training,  installation and non-warranty repairs provided to AuraGen® customers.  The Company does not consider these services to be a significant source of revenues.

Net revenues in fiscal 2003 declined  65% to $1.1 million from $3.1 million in fiscal 2002 due to weakness in sales  caused by the general slowdown in the overall economy, the general economic  effect of the war in Iraq and the impact of the Company's weakened financial  condition on its ability to market effectively and on its ability to obtain  commitments from potential long-term customers.

### Cost of Goods

Cost of goods increased to $0.9  million in fiscal 2004 from $0.6 million in fiscal 2003. This increase is generally  proportional to the increase in net revenues. The 50% gross margin in fiscal  2004, excluding the impact of the $0.6 million inventory write down recorded  in fiscal 2004, is slightly improved from 48% in fiscal 2003 largely due to  higher margins realized on the product version sold to military and government  entities.

Cost of goods decreased to $0.6  million in fiscal 2003 from $1.5 million in fiscal 2002; generally proportional  to the decline in net revenues. Gross margin of 48% in fiscal 2003 was lower  than the 52% gross margin in fiscal 2002, excluding the impact of the $1.5 million  inventory write down recorded in fiscal 2002, largely due to somewhat higher  costs incurred in manufacturing smaller quantities of units.

### Engineering, Research  and Development 

Engineering, research and development  expense for fiscal 2004 of $2.1 million represents a 46% decrease from $3.5  million in fiscal 2003. The full year impact of cost control efforts taken  during fiscal 2003 and continued in fiscal 2004, most significantly a reduction  in engineering headcount, produced the majority of the expense reductions in  fiscal 2004. Labor and labor related costs included in engineering expense amounted  to $1.8 million in fiscal 2004, compared to $2.7 million in fiscal 2003.

Research and development activities  were negligible in fiscal 2004 ($0.4 million and $0.8 million in fiscal 2003  and fiscal 2002, respectively) as the Company significantly reduced its research  activities due to its financial condition. The Company expects research and  development activites to continue at this reduced level until it has the financial  resources available to fund such activities.

Engineering, research and development  expense of $4.0 million in fiscal 2003 represents a decrease of $5.2 million  (57%) from $9.2 million in fiscal 2002. Approximately $4.6 million of this  decrease was due to the elimination of depreciation expense resulting from the  Company's fourth quarter fiscal 2002 write off of tooling fixed assets that  were impaired under SFAS No. 144.

### Selling, General and Administrative

Selling, general and administrative  ("SG&A") expenses declined 3% from fiscal 2003 to $7.2 million  in fiscal 2004, from $7.4 million in fiscal 2003. The full year impact of cost  control efforts taken during fiscal 2003 and continued in fiscal 2004, primarily  staffing reductions, were substantially offset by a $2.1 million write off of  a long-term note receivable that stopped performing during fiscal 2004 (see  Note 6 in the Consolidated Financial Statements). Labor and labor related costs  included in SG&A expense amounted to $2.3 million in fiscal 2004, compared  to $4.2 million in fiscal 2003. A significant portion of this decrease is attributable  to the termination of six senior management persons at February 28, 2002. Several  of these positions were left vacant or eliminated in fiscal 2003, resulting  in lower labor costs for the period.

SG&A expenses were $7.4 million  in fiscal 2003, a decrease of $2.6 million (26%) compared to $10.0 million in  fiscal 2002. The decrease from fiscal 2002 to fiscal 2003 was primarily due  to reductions in labor and litigation costs; a significant portion of which  is attributable to the termination of six senior management persons at February  28, 2002.

### Legal Settlements

There were no legal settlements  with material expense impact during fiscal 2004. Legal settlements resulted  in expense of $0.2 million in fiscal 2003 and a gain of $2.8 million in fiscal  2002. The 2003 expense was related to the final settlement in the Frankston  matter. The 2002 gain resulted from settlements with Excalibur of $2.0 million  and Deutsche Financial of $1.2 million. These settlement gains were partially  offset by a litigation loss of $400,000 resulting from a NewCom consumer class  action suit. 

### Asset Impairment

During fiscal 2004, the Company  reevaluated its intentions with regard to its patents and trademarks related  to products not related to its core business. This evaluation resulted in the  conclusion that certain of these patents and trademarks would not generate revenues  or cash flows during their remaining lives and, accordingly, the value of these  assets was written off. The Company recorded a $2.0 million asset impairment  charge as a result of this write off. During fiscal 2003, the Company undertook  efforts to sell the Company's headquarters (discussed below). The Company determined  that the value of these buildings had declined and recorded a $2.3 million asset  impairment charge to reflect a realizable value for assets held for sale less  than net book value. In fiscal 2002, the Company incurred $7.7 million of asset  impairment charges including a charge for obsolescence of engineered tooling  amounting to $4.6 million and for unrealizable advertising trade credits of  $3.1 million. These charges were included in loss from operations under FASB  144.

### Severance Expense

The Company did not incur any severance  expense during fiscal 2004. Severance expense of $0.2 million in fiscal 2003  is principally due to the termination of the employment of Mr. Joshua Hauser.  In fiscal 2002, severance expense totaled $1.1 million which was attributable  to the termination of six members of the Company's senior management, including  Zvi Kurtzman and Steven Veen. 

### Non-Operating Income and  Expenses

The Company incurred $0.5 million,  $0.8 million and $1.4 million of asset impairment charges in fiscal 2004, fiscal  2003 and fiscal 2002, respectively, primarily due to a decline in the value  of non-core long-term investments. 

During fiscal 2003, the Company  completed a sale of a minority interest in its Aura Realty, Inc. subsidiary  (see Note 4 in the Consolidated Financial Statements). The Company realized  a $0.6 million loss on this sale. During fiscal 2004, the Company issued additional  warrants to the purchasers of this minority interest due to its failure to register  certain shares for resale and recorded an additional loss of $0.2 million (see  Item 7 - Liquidity and Capital Resources and Note 4 to the Consolidated Financial  Statements).

Interest expense decreased to $2.4  million in fiscal 2004 from $2.7 million in fiscal 2003. Interest expense in  each of these periods included non-cash charges attributable to a beneficial  conversion feature of convertible notes; these non-cash charges amounted to  $1.3 million and $1.5 million in fiscal 2004 and fiscal 2003, respectively.  Interest expense increased slightly from $2.7 million in fiscal 2003 to $2.5  million in fiscal 2002.

Other income/expense, net was an  expense of $0.1 million in fiscal 2004 compared to income of $0.4 million in  fiscal 2003 and income of $0.5 million in fiscal 2002. 

The Company realized extraordinary  gains of approximately $0.1 million in fiscal 2004, $1.2 million in fiscal 2003  and $1.9 million in fiscal 2002 from the forgiveness of debt by certain of the  Company's creditors.

### Critical Accounting Policies  and Estimates

The Company's discussion and analysis  of its financial conditions and results of operations are based upon its consolidated  financial statements, which have been prepared in accordance with accounting  principles generally accepted in the United States of America. The preparation  of financial statements requires management to make estimates and disclosures  on the date of the financial statements. On an on-going basis, the Company evaluates  its estimates, including, but not limited to, those related to revenue recognition.  The Company uses authoritative pronouncements, historical experience and other  assumptions as the basis for making judgments. Actual results could differ from  those estimates. The Company believes that the following critical accounting  policies affect its more significant judgments and estimates in the preparation  of its consolidated financial statements.

Aura is required to make judgments  based on historical experience and future expectations, as to the reliability  of shipments made to its customers. These judgments are required to assess the  propriety of the recognition of revenue based on Staff Accounting Bulletin ("SAB")  No. 101, "Revenue Recognition," and related guidance. Because sales  are currently in limited volume and many sales are for evaluative purposes,  the Company has not booked a general reserve for returns. The Company will consider  an appropriate level of reserve for product returns when its sales increase  to commercial levels.

Inventories consist primarily of  components and completed units for the Company's AuraGen® product.  Inventories are valued at the lower of cost (first-in, first-out) or market.  Provision is made for estimated amounts of current inventories that will ultimately  become obsolete due to changes in the product itself or vehicle engine types  that go out of production. Due to continuing lower than projected sales, the  Company is holding inventories in excess of what it expects to sell in the next  fiscal year. The net inventories which are not expected to be realized within  a 12-month period based on current sales forecasts have been reclassified as  long term. Management believes that existing inventories can, and will, be sold  in the future without significant costs to upgrade it to current models and  that the valuation of the inventories, classified both as current and long-term  assets, accurately reflects the realizable values of these assets. The AuraGen®  product being sold currently is not technologically different from those in  inventory. Existing finished goods inventories can be upgraded to the current  model with only a small amount of materials and manpower. We make these assessments  based on the following factors: i) existing orders, ii) age of the inventory,  iii) historical experience and iv) the Company's expectations as to future sales.  If expected sales volumes do not materialize or if significant discounts from  current pricing levels are granted to generate sales, there would be a material  impact on the Company's financial statements.

Long-lived assets, consisting primarily  of property and equipment, and patents and trademarks, comprise a significant  portion of the Company's total assets. Long-lived assets are reviewed for impairment  whenever events or changes in circumstances indicate that their carrying values  may not be recoverable. Recoverability of assets is measured by a comparison  of the carrying value of an asset to the future net cash flows expected to be  generated by those assets. Net cash flows are estimated based on expectations  as to the realizability of the asset. Factors that could trigger a review include  significant changes in the manner of an asset's use or the Company's overall  strategy.

Specific asset categories are treated  as follows:

Accounts Receivable: The Company  records an allowance for doubtful accounts based on management's expectation  of collectibility of current and past due accounts receivable.

Property, Plant and Equipment: The  Company depreciates its property and equipment over various useful lives ranging  from five to ten years. Adjustments are made as warranted when market conditions  and values indicate that the current value of an asset is less than its net  book value.

Long-Term Investments: As the Company  does not hold a sufficient interest in its investments to exercise significant  influence and the fair market value of the investments are not readily determinable,  long-term investments have been accounted for under the cost method. Management  reviews financial and other available information pertaining to such investments  to determine if and when a decline, other than temporary, in the value of any  investment has occurred and an adjustment is warranted.

Patents and trademarks: As the Company's  business depends on using new technology to create new products, impairments  in patents can be triggered by changed expectations regarding the foreseeable  commercial production of products underlying such patents.

When the Company determines that  an asset is impaired, it measures any such impairment by discounting an asset's  realizable value to the present using a discount rate appropriate to the perceived  risk in realizing such value. When the Company determines that an impaired asset  has no foreseeable realizable value, it writes such asset down to zero.

The Company continues to experience  acute liquidity challenges. At February 29, 2004, the Company had cash of $0.1  million as compared to a cash level of $0.2 million at February 28, 2003, and  a working capital deficit of approximately $14.0 million as compared to a deficit  of approximately $11.6 million at the end of the prior fiscal year. These conditions  combined with the Company's historical operating losses raise substantial doubt  as to the Company ability to continue as a going concern. As of July 30, 2004,  the Company had cash of less than $0.1 million.

The cash flow generated from the  Company's operations to date has not been sufficient to fund its working capital  needs, and the Company cannot predict when operating cash flow will be sufficient  to fund its working capital needs. In the past, in order to maintain liquidity  the Company has relied upon external sources of financing, principally equity  financing and private and bank indebtedness. The Company has no bank line of  credit.

The Company requires additional  debt or equity financing to fund ongoing operations. In June 2004, the Company  reached nonbinding agreements in principle with a number of parties that, when  and if consummated, resolve certain litigation involving the Company and former  management of the Company, resolve the Company's defaults on its pending sale  and leaseback of its headquarters facilities, set forth a schedule for the Company  to obtain longer term funding, and provide for changes in the Company's senior  management and Board of Directors (together, the "2004 Recapitalization Transactions").  Completion of the 2004 Recapitalization Transactions, including receipt of funding,  will provide the Company a more stable financial condition. The Company, however,  will continue to require forbearance of several creditors as it seeks to grow  sales, and may require further financing to remain solvent. **Completion  of such agreements would substantially dilute the interests of existing stockholders,  reducing by at least one-half their proportional interest in the Company.  In the event the agreements are not consummated, it is likely that the Company  would need to file for bankruptcy protection.

The Company is seeking to raise  additional capital; however, the Company has no firm commitments from third  parties other than those involved in the 2004 Recapitalization Transactions to  provide additional financing and there can be no assurance that financing will  be available at the times or in the amounts required. The issuance of additional  shares of equity in connection with such financing could dilute the interests  of existing stockholders of the Company, and such dilution could be substantial.  The Company must increase its authorized shares in order to be able to sell  common equity, and intends to propose to stockholders such action as well as  a reverse stock split of its common shares; there can be no assurance that either  such action will be approved. If financing cannot be arranged in the amounts  and at the times required, the Company will cease operations. 

At February 29, 2004, the Company  had accounts receivable, net of allowance for doubtful accounts, of $0.7 million;  $0.4 million at February 28, 2003. The Company's collections tend to average  60 - 90 days from invoice due to the nature of its significant customers. At  February 29, 2004, an unusually large amount of receivables had aged past 90  days ($0.3 million); all of these accounts have been collected as of July 30,  2004. As of July 30, 2004, the Company had net accounts receivable of $0.4  million.

Spending for property and equipment  amounted to less than $0.1 million in each of fiscal 2004 and fiscal 2003. The  Company has no material capital project that would require funding. The Company's  current plant and equipment is sufficient to support its current level of sales.

Debt repayments of $0.3 million  were made in fiscal 2004 as compared to debt repayment of $1.0 million in fiscal  2003.

The Company leased warehouse space  located in Rancho Dominguez, California until August 2003. Minimum monthly  rent under the lease was approximately $3,900. Rent expense was less than $0.1  million for each of fiscal 2004, fiscal 2003 and fiscal 2002. The status of  the Company's lease of its headquarters and manufacturing facility is discussed  below. 

Due to the Company's acute liquidity  challenges, it has defaulted in payments under many of its financial obligations  (see Note 9 in the Consolidated Financial Statements). These defaults effectively  render these obligations payable on demand and the entire principal balance  of each obligation has been included in current liabilities in the accompanying  Consolidated Financial Statements. Actions by the parties to these obligations  to enforce their rights to collect the amounts due could require the Company  to cease operations.

During fiscal 2003, the Company  issued 42,360,005 shares of common stock (the "2003 Subtotal Shares")  in private placements and for services in exchange for consideration valued  at approximately $5.9 million, including approximately $5.7 million of cash  funding and approximately $0.2 million in satisfaction of liabilities. During  fiscal 2003, the Company issued $3.75 million of notes as follows:

 -          $1.75 million of convertible term notes, bearing annual interest of 8%, for  net cash proceeds of $1.75 million (the "8% Notes"). The 8% Notes  are convertible into common stock at prices ranging from $0.071 to $0.110 per  share. $1.13 million of 8% Notes were exchanged for Series A Preferred as discussed  below. $0.62 million of 8% Notes remain outstanding; however, the stated terms  of these notes expired in January through March 2003 and they are now payable  upon demand.

 -          $1.1 million of convertible term notes, bearing interest at 5% per annum, for  net cash proceeds of $1.1 million (the "5% Notes"). The 5% Notes were  convertible into Series A Preferred stock, which is convertible into 125 shares  of common stock, at $10.00 per share (effective price per common share at conversion  is $0.080). All of the 5% Notes were converted into Series A Preferred subsequent  to year end as discussed below.

 -          $0.9 million of convertible term notes, bearing interest at 5% per annum, for  net cash proceeds of $0.9 million (the "5% Discounted Notes"). The  5% Discounted Notes were convertible into Series A Preferred stock, which is  convertible into 125 shares of common stock, at an effective conversion price  of $4.55 per share (effective price per common share at conversion is $0.036).  All of these notes were converted into Series A Preferred subsequent to year-end  as discussed below.

During fiscal 2003, the Company  agreed to sell its Aura Realty, Inc. subsidiary ("Aura Realty") to  a group of individuals, including five members of the Company's former management  including Zvi Kurtzman and Steve Veen, (the "Purchasers") and to lease  back the Company's headquarters facility, which is owned by Aura Realty. The  purchase price of $7,350,000 was to be paid by assumption or refinancing of  the current mortgage on the property (which had a principal balance of approximately  $5.1 million). Net of this mortgage, $0.6 million of security deposits and prepayments  paid to the Purchasers to secure the Company's performance, $0.1 million of  past due amounts owed to certain of the Purchasers and $0.1 million of fees  to Purchasers, the Company received approximately $1.5 million, of which $0.9  million was advanced to the Company by the Purchasers prior to closing and $0.6  million was transferred to the Company at the initial closing on December 1,  2002. Also on December 1, 2002, the Company transferred 49.9% of the common  stock of Aura Realty to the Purchasers, issued to Purchasers a $1.0 million  term note and granted Purchasers a security interest in a note receivable to  secure the Company's performance under the agreement. The Purchasers also received  warrants to purchase 15,000,000 shares of common stock, exercisable through  November 30, 2007, at exercise prices ranging from $0.15 to $0.25 per share.  The value of the warrant was calculated at $0.7 million using the Black-Scholes  method of valuation. The Purchasers also purchased 21,366,347 shares of the  Company's common stock for $1.5 million, which is included in the 2003 Subtotal  Shares. The Company is required to issue approximately 8.2 million additional  shares and has issued 5.5 million additional warrants to Purchasers because  of its failure to register the shares for resale. 

The holder of the mortgage did not  consent to the transfer of the Company's remaining 51.1% interest in Aura Realty  and the Company failed to make certain payments to the Purchasers as required  under the agreement. During June 2003, the Company entered into a forbearance  agreement with the Purchasers, whereby the Company agreed to issue the additional  warrants required under the agreements for failure to file a stock registration,  register the previously issued shares and the shares underlying the warrants  for resale to the public, assign the receivable (a note issued by Alpha Ceramic)  to the Purchasers, promptly engage an exclusive listing agent for the sale of  the property and pay certain amounts in default on the mortgage. The Company  is currently in negotiations with the Purchasers and the holder of the mortgage  relative to these matters. The Company originally recorded and reported the  Aura Realty transaction as a sale of 100% of its Aura Realty subsidiary. The  events subsequent to year-end raised significant doubt that the remainder of  the transaction contemplated by the agreement would ever be completed. As a  result, the transaction was recorded at February 28, 2003 as a sale of a minority  interest in Aura Realty.

During fiscal 2003, the Company  was in default of the mortgage secured by a deed of trust on the Company's headquarters  facility. The mortgagor commenced foreclosure proceedings and the Company obtained  repeated extensions of the foreclosure sale. In June 2004, the Company made  sufficient payments to cure the defaults and the pending foreclosure has been  withdrawn. As part of the 2004 Recapitalization Transactions, Aura Realty has  agreed to sell the facility to a new buyer and such buyer has agreed to lease  the facility back to the Company for a term of four years. See "Item 7. - Liquidity  and Capitol Resources"

Also during fiscal 2003:

-  the Company settled approximately    $1.5 million of trade debt liabilities representing a portion of a long-term    restructuring for a total amount of $0.4 million, resulting in an extraordinary    gain on extinguishments of debt of $1.1 million.
-  the Company issued 923,077 shares    of common stock that were committed as of February 28, 2002, which were valued    at $207,692, or $0.225 per share.

In March 2003, the Company issued  $0.4 million of additional "5% Discounted Notes". All of these notes  were converted into Series A Preferred as discussed below.

On March 25, 2003, the Company designated  1,500,000 shares of its authorized preferred stock as Series A Convertible Redeemable  Preferred Stock (the "Series A Preferred"). Each share of Series A  Preferred has a par value of $0.005, a liquidation preference of $10.00 plus  accrued unpaid dividends and is convertible into common stock at $0.080 per  share, based on the liquidation preference. Dividends accrue on each share at  the rate of 5% of the liquidation preference per annum. The Company may call  the Series A Preferred for redemption on or after March 31, 2004 subject to  certain conditions. As of February 29, 2004, 591,110 shares of Series A Preferred  were outstanding, issued as set forth below.

On March 31, 2003, the Company exchanged  $1.1 million of 8% Notes and converted $1.1 million of 5% Notes and the $1.2  million of 5% Discounted Notes, plus accrued interest in all cases, into 534,020  shares of Series A Preferred. The average effective net acquisition price of  the shares of Common Stock underlying the conversion feature, based on the amounts  paid for the notes, is $0.054 per share.

Between May 29 and February 29,  2004, the Company received approximately $5.8 million****of interim funding  from Koyah Leverage Partners, LLP, Koyah Partners, LP, certain affiliated and  non-affiliated parties to meet its immediate cash needs. These amounts, including  $0.97 million of additional notes issued between March 1, 2004 and July 30,  2004 (the "Intercreditor Secured Debt") are evidenced by secured notes payable  on June 15, 2004 (the "Secured Notes"). As of July 30, 2004, the holders of  the Intercreditor Secured Debt have not presented a demand for payment of the  Secured Notes that are currently due and payable. The Secured Notes bear interest  at 10% per annum and are convertible at the option of the holder into new debt  or equity securities at of the Company at a 20% discount to the best terms by  which such new debt or equity is sold to any new investor. The Secured Notes  may be prepaid on notice at a 15% premium. Repayment of the Secured Notes  is secured by substantially all the assets of the Company (with limited exceptions).  Pursuant to the 2004 Recapitalization Transactions, the maturity of such notes  is to be extended to June 30, 2005, the conversion discount / prepayment premium  is to be eliminated, and a portion of such notes (initially $3.0 million of  principal and interest) are to be converted into Series B Preferred Stock. There  can be no assurance that the proposed 2004 Recapitalization Transactions will  be completed or that all of the Secured Notes will be converted as contemplated  by these transactions.

In connection with the foregoing  financing, primarily as inducements to the lender to continue to provide interim  funding, the Company agreed to issue warrants to purchase an aggregate of 3,200,000  shares of common stock at a price per share of $0.11, exercisable through January  7, 2011, and additional warrants (with a net exercise feature) to purchase an  aggregate of 10,209,878 shares of common stock at a price per share of $0.024.

Also during fiscal 2004:

-  the Company issued 57,090 shares    of Series A Preferred in a private placement for net cash proceeds of $259,500.    The effective net acquisition price of the shares of Common Stock underlying    the conversion feature, based on the amounts paid for the preferred stock    is $0.036 per share. 
-  the Company issued a $200,000    note in exchange for a loan. The note and $10,000 fixed fee interest became    due on June 7, 2003. As part of this borrowing, the Company issued warrants    to purchase 3,100,000 shares of common stock at $0.050 per share; 3,000,000    to the lender and 100,000 to the broker. The Company paid this note in full    in August 2003.

During  fiscal 2005, the Company has continued to rely on interim funding to cover its  cash shortfalls and to provide funding to defer the foreclosure and cure the  defaults under the mortgage on its headquarters facility. Amounts received  through July 30, 2004 are as follows:

-  $1,140,000 from Koyah Leverage    Partners, LLP and other investors in the Secured Notes. These amounts were    added to the Intercreditor Secured Debt (see above). 
-  $300,000 from individuals affiliated    with the Aries Group Ltd. as an advance against the purchase of Series B Preferred    Stock contemplated in the 2004 Recapitalization Transactions (see below).
-  $400,000 from the purchasers    under the contemplated sale and lease back of the Company's headquarters facilities    as an advance against such purchase. These funds were used to cure the defaults    on the mortgage note related to the real estate (see below).

In April 2004, the Company issued  warrants (with a net excersice feature) to purchase an agregate of 10,209,878  shares of common stock at a price per share of $0.024 to Koyah Leverage Partners,  LLP and other investors in the Secured Notes, primarily as inducements to continue  to provide interim funding.

There can be no assurance that the  proposed 2004 Recapitalization Transactions will be completed or that all of  the Secured Notes will be converted as contemplated by these transactions.

There can be no assurance that additional  interim funding will be obtained. 

## The 2004 Recapitalization  Transactions

In May and June 2004, the Company  reached nonbinding agreements in principle with a number of parties that, if  consummated, would resolve the Company's monetary defaults on its headquarters  mortgage, settle certain litigation involving the Company and former management,  provide for additional equity at closing, provide for conversion to equity of  existing secured debt and provide for changes in the Company's senior management  and Board of Directors (together, the "2004 Recapitalization Transactions").  Management believes that following completion of the 2004 Recapitalization Transactions,  including receipt of funding, the Company will have a more stable financial  condition. Completion of the 2004 Recapitalization Transactions would substantially  dilute the interests of existing stockholders, reducing by at least one-half  their proportional interest in the Company. Although nonbinding term sheets  have been executed with the parties for each of these transactions, no assurances  can be given that the transactions will close in the immediate future or at  all. In the event the agreements are not consummated, it is likely that the  Company would need to file for bankruptcy protection. Even if the 2004 Recapitalization  Transactions are completed as anticipated, the Company will continue to require  forbearance of several creditors and may require additional financing in the  next twelve months as it seeks to increase its sales. As a result of the 2004  Recapitalization Transactions, the Company will record an as yet undetermined  charge to earnings due to the settlement of certain litigation at amounts in  excess of those currently reserved on the Company's balance sheet, and the expected  loss on the sale of the headquarters facility.

The 2004 Recapitalization Transactions  include four related components: the sale of the Company's headquarters facility;  the settlement of outstanding litigation with the Aries Group, conversion of  Intercreditor Secured Debt into equity and the receipt of new equity funding.  Each component involves in the issuance of shares of a new series of preferred  stock, Series B Cumulative Convertible Preferred Stock (the "Series B Preferred  Stock").

*Issuance and  Terms of Series B Preferred Stock.* Each of the components of the 2004 Recapitalization  Transactions involves issuance of Series B Preferred Stock. To consummate the  2004 Recapitalization Transactions, the Company's Board of Directors intends to  designate five (5) million shares of the Company's authorized preferred stock  as Series B Cumulative Convertible Preferred Stock. The new Series B Preferred  Stock will rank senior to the Company's common stock and Series A Convertible,  Redeemable Preferred Stock (the "Series A Preferred Stock"), accrues dividends  at an annual rate of 8% and is convertible into shares of the Company's common  stock at $0.02 per common share. The conversion price is subject to adjustment  to the lowest price at which the Company in the future sells shares of common  stock, with limited exceptions. The Company has the right to force conversion  of the Series B Preferred Stock into common stock upon the satisfaction of a  number of conditions, including the Company's common stock trading at a price  in excess of $0.10 for twenty consecutive trading days. The Series B Preferred  Stock has class voting rights to elect four directors of the Company and to  approve certain corporate transactions, including the issuance of any shares  of preferred stock on parity with or senior to the Series B Preferred Stock.  As discussed below, certain shares of Series B Preferred Stock may be sold at  a substantial discount to their liquidation preference.

The Series B Preferred  Stock cannot be converted into common shares unless and until the Company's  shareholders approve an increase in the number of authorized common shares.  As part of the 2004 Recapitalization Transactions, the Company is committing to  seek such shareholder approval as soon as possible. 

In addition, the  Company has a tentative arrangement to convert all accrued Series A Preferred  dividends into Series B Preferred stock. This will result in issuance of 75,655  shares of Series B Preferred.

*The Sale of the Headquarters  Facility.* In May 2004, the Company, Aura Realty and the minority shareholders  in Aura Realty (the "Realty Minority Shareholders") agreed, subject to certain  conditions, to a sale of the Company's headquarters facility to a buyer (the  "Real Estate Buyer") controlled by Yair Ben-Moshe and David Maimon (the "May  2004 Agreements"). On June 11, 2004, the Realty Minority Shareholders sent  notice to the Company that it had defaulted on the agreement as that pertained  to the settlement with the Realty Minority Shareholders and terminated the agreement.  The Company has continued negotiations with the Realty Minority Shareholders  since that date but has not yet been successful in getting them to recommit  to the May 2004 Agreements or any other settlement. Such an agreement with  the Realty Minority Shareholders is a condition precedent to the Real Estate  Buyer's obligation to complete the purchase. 

Through July 30, 2004, Messrs. Ben-Moshe  and Maimon have advanced the Company $0.4 million , which has been used, combined  with other funds provided by the Company, to cure all existing defaults with  the mortgagor and bring the note current. Such payment will be applied to the  purchase price and, in the event closing of such sale does not occur, will be  deemed to be an unsecured loan to the Company bearing interest at 10% per annum  and payable in 24 equal monthly payments, and convertible, at the option of  the holder, into Series B Preferred Stock. 

As contemplated, the sales price  of the property is $7.8 million, of which approximately $5.0 million would be  used to repay the existing mortgage, $1.6 million would be paid to the Realty  Minority Shareholders,$0.8 million would be credited to the Real Estate Buyer  for deposits required under the lease back (discussed below) and building repairs  and the remaining approximately $0.4 million has already been advanced to the  Company as of July 30, 2004. In addition to the subject real estate, the Real  Estate Buyer would also receive 220,000 units of the Series B Placement (as  described below) and four-year warrants to purchase 15,000,000 shares of the  Company's commons stock at an exercise price of $0.075. At closing of the sale,  Aura would lease back a portion of the premises (the warehouse and the first  floor of the office building) for a period of 4 years at a monthly rent of $56,000,  triple net. Aura will provide a security deposit of approximately $0.67 million,  to be applied to the fourth year's rent. Also at closing, (i) the Realty Minority  Shareholders would cancel the existing $1.0 million note issued by Aura on December  1, 2002, and receive from Aura a new note in the amount of $0.25 million, bearing  interest at 12.3% and payable over 24 months, (ii) the Alpha Ceramics note with  a balance due of approximately $2.0 million as of July 30, 2004, which had been  assigned to the Realty Minority Shareholders, would be reassigned to the Real  Estate Buyer (this note is currently nonperforming; no payments have been received  since November 2003), (iii) and the Realty Minority Shareholders would receive  shares of Series B Preferred Stock with a liquidation preference of $0.15 million.  Aura is obligated to pay the Realty Minority Shareholders $40,582 per month  for continued use of the facility pending closing of the sale; such amount is  in addition to continued payments due under the mortgage. As of July 30, 2004,  the Company was in default of making such payment to the Realty Minority Shareholders  for the month of July. Upon closing of the transactions described above, the  Realty Minority Shareholders would release any further claims they have related  to Aura Realty and the December 1, 2002 Sale/Leaseback Agreement.

*The Litigation Settlement.*  As a precondition to obtaining new funding , the Company has negotiated a tentative  litigation settlement with Zvi Kurtzman, certain other formers members of its  management, and certain other individuals, all of whom are collectively referred  to as the "Aries Group". The settlement contains mutual general releases,  mutual covenants not to sue and terminates the litigation described in Item  3 - Legal Proceedings under the heading Former Management Suits and other litigation  brought by members of the Aries Group against management of the Company. Pursuant  to the settlement, the Company would agree (i) to pay members of the Aries Group  an aggregate of $801,509 in sixteen monthly installments (which total payments  may be reduced to $726,508 if Aura timely pays all installments), subject to  acceleration if certain additional capital raising targets are met and subject  to the option to convert unpaid amounts into units of the Series B Placement,(as  described below) (ii) to reinstate approximately 14 million options and warrants  previously issued to members of the Aries Group with exercise prices not less  $0.31 per share of common stock, (iii) to issue to members of the Aries Group  new ten-year warrants to purchase an aggregate of 34,500,000 shares of common  stock exercisable at a price of $0.07 per share, (iv) issue to members of the  Aries Group 6,208,048 shares of the Company's common stock and (v) to issue  to members of the Aries Group shares of Series B Preferred Stock with an aggregate  liquidation preference of $458,583 and approximately 5.7 million seven-year  warrants exercisable at a price of $0.02, consistent with the Series B Placement  described below. Certain members of the Aries Group are also participating in  the Series B Placement. A failure of the Company to pay amounts due or issue  shares or warrants as provided by the settlement terminates the Aries Group's  requirement to fund its Series B commitment. Conversely, a failure of the Aries  Group to pay amounts due pursuant to its Series B commitment waives the Company's  requirement to pay amounts due under the settlement unless and until such payments  are made.

*The Series B Placement.*The  Company is seeking to raise a minimum of $5 million and a maximum of $15 million  in a private placement of units consisting of shares of Series B Preferred Stock  and warrants to purchase common stock. The Company has received preliminary  indications of interest from subscribers proposing to invest an aggregate of  approximately $6.9 million (exclusive of payments on real estate transaction  and conversion of Intercreditor Secured Debt).

Certain funds have already advanced  to the Company to be applied to the placement; as of July 30, 2004, approximately  $0.6 million has been received. The Company has used and would be unable to  return such funds in the event the offering does not close; in which case, such  funds evidence short-term indebtedness of the Company. The Company proposes  to sell the units at the liquidation preference of the shares of Series B Preferred  Stock, with each unit to include warrants to purchase common stock in an amount  equal to the 25% of the number of shares of common stock obtainable upon conversion  of the associated Series B Preferred Stock, at a price per share of $0.02, exercisable  for seven years. Thus, for an investment of $100,000, an investor receives shares  of Series B Preferred Stock with a liquidation preference of $100,000, convertible  into 5,000,000 shares of common stock, and warrants to purchase an additional  1,250,000 shares of common stock. It is anticipated that purchasers of the units  may pay all or a portion of the purchase price in the form of unsecured personal  promissory notes bearing interest at 8% and payable with a term up to nine months.  Because the fair market value of the promissory notes may be deemed to be substantially  less than their face value, and also because a portion of the consideration  must be assigned to the included warrants, the Company will be selling shares  of Series B Preferred Stock at a substantial discount to their liquidation preference,  and the Company's capital accounts may not be increased by the full liquidation  preference of the offering. 

*The Conversion of Intercreditor  Secured Debt to Equity.*Subject  to the Company completing each of the transactions constituting the 2004 Recapitalization  Transactions and raising at least $3.0 million in in the equity offering not  to be used for the real estate or litigation settlement, the holders of the  Intercreditor Secured Debt (with a balance, including accrued interest of approximately  $7.2 million as of July 30, 2004) have agreed to convert $2.0 million of such  debt into shares of Series B Preferred Stock and warrants, on the same terms  as the cash investors. To the extent the Company raises new capital funding  in excess of such amounts and meets other specified conditions, including but  not limited to having an effective registration of its common stock, such holders  would convert an additional amount of Intercreditor Secured Debt equal to the  amount of such new excess capital funding obtained. The agreement also extends  the due dates of the remaining notes to June 15, 2005 and gives holders of the  Intercreditor Secured Debt the right to convert all or a portion of such debt  at any time on the foregoing terms, terminates any other rights they hold to  convert the Intercreditor Secured Debt at preferential rates into new securities  sold by the Company subject to their conversion rights, and permits the Company  to prepay such debt at any time without premium

*Management Changes.* In connection  with the foregoing transactions, Mr. Meehan will resign from his position as  Chief Executive Officer and receive one year's severance payments, as provided  under a contract provided Mr. Meehan by the Company in February 2004. Mr. Meehan  will continue to serve as a director of the Company. Mr. Rescino resigned his  position as Interim Chief Financial Officer in June 2004 and has not been replaced.  Mr. Rescino continues to provide the Company consulting services. 

In addition, Messrs. Albert, Diamant  and Harrington have agreed to resign from the Board of Directors of the Company  effective with initial funding of the placement of Series B Preferred Stock.  The new board members selected by the investors who are parties to the voting  agreement are Raymond Yu, Dr. Fred Balister and Izar Fernbach. Mr. Meehan's  continuance as a Board member represents the fourth Board member to be elected  by the holders of the Series B Preferred Stock. 

*Capitalization of the Company*.  Assuming the 2004 Recapitalization Transactions are completed, with an offering  size of the currently-anticipated $6.9 million and all of the outstanding Intercreditor  Secured Debt is converted, the Company will have approximately 1.5 billion shares  outstanding or committed for issuance. The principal investors in Series B  Preferred Stock would be: 

| Investor                                        | Series B Preferred Stock Shares | Common Shares, including Conversion        of Series B | Common Shares from Exercise        of Warrants | Post-issuance Beneficial Ownership        (1) |
|-------------------------------------------------|---------------------------------|--------------------------------------------------------|------------------------------------------------|-----------------------------------------------|
|                                                 |                                 |                                                        |                                                |                                               |
| Koyah      Leverage Partners, LP and affiliates | 1,017,539                       | 254,384,778                                            | 63,507,183                                     | 28.5%                                         |
| Yair Ben      Moshe                             | 547,947                         | 136,986,668                                            | 41,364,436                                     | 14.4%                                         |
| David      Maimon                               | 541,831                         | 135,457,746                                            | 41,364,436                                     | 14.2%                                         |
| Zvi Kurtzman                                    | 198,772                         | 50,665,357                                             | 24,919,936                                     | 6.1%                                          |
| Prudent      Bear Fund, Inc.                    | 162,532                         | 40,633,068                                             | 7,937,500                                      | 8.6%                                          |
| All other      (30 persons)                     | 753,959                         | 193,725,328                                            | 61,357,000                                     | 20.5%                                         |

(1) Common shares from conversion  of Series B Preferred Stock and exercise of warrants plus any beneficially owned  shares as shown in Item 12 for each investor divided by the sum of 430,923,150  shares outstanding plus the estimated total number of common shares that investors  in the Series B Preferred Stock as a group have the right to acquire plus, in  each case, the other shares as to which the particular stockholder has the right  acquire, as indicated in the applicable footnote to Item 12. Note that investors  in Series B Preferred Stock not listed in Item 12 may have beneficial ownership  positions in the Company of less than 5% that are not considered in this presentation.

There can be no assurance that the  2004 Recapitalization Transactions will be consummated as described.

## ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Consolidated Financial  Statements at page F-1.

## ITEM 9. CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

# PART III

## ITEM 10. DIRECTORS  AND OFFICERS OF THE COMPANY

*Directors*

The following table sets forth of  the Company's current Directors, their age, and the office they hold with the  Company.

| Name                      | Age    | Title                                              |
|---------------------------|--------|----------------------------------------------------|
|                      |   |                                               |
| Neal Meehan               | 63     | Chairman, Director, Chief        Executive Officer |
|                      |   | and President                                      |
| Carl Albert               | 61     | Director                                           |
| Lawrence Diamant          | 62     | Director, Member of Compensation        Committee  |
| Salvador Diaz-Verson, Jr. | 52     | Director, Member of Compensation        Committee  |
| James S. Harrington       | 63     | Director, Member of Audit        Committee         |
| John Pincavage            | 60     | Director, Member of Audit        Committee         |
| Harry E. Soyster          | 69     | Director, Member of Compensation        Committee  |

NEAL MEEHAN has served as Chairman  of the Board of Directors, Chief Executive Officer and President since July  2002. He has been a Director of the Company since October 2000. Mr. Meehan's  services as Chairman, Chief Executive Officer and President are provided under  the terms of a Consulting Agreement between the Company and air2ground, LLC.  He is currently Managing Partner of air2ground, LLC and is involved in business  development and strategic planning for start-up and mature companies. Mr. Meehan's  business career spans the transportation and telecommunications sectors. He  has served as President and Chief Executive Officer of a number of airlines  including New York Air, Midway Airlines, Chicago Air and Continental Express.  He has also served in various marketing and operations capacities for American  Airlines and Continental Airlines. In addition, he has served in various senior  capacities for a number of telecommunications firms including In-Flight Phone  Corp., Iridium LLC and Hush Communications USA, Inc., a firm specializing in  data encryption. After a tour as an officer in the United States Marine Corps,  Mr. Meehan received his MBA from St. Johns University. Mr. Meehan is also the  recipient of an honorary Doctorate of Commercial Science from St. Johns University.

CARL ALBERT is a Director of Company  and has served in this capacity since

July 2001. From March 2002 until  July 2002, Mr. Albert served as Chairman of the Board of Directors. Mr. Albert  was, until February 2002, a member of the Board of Directors of Fairchild Dornier  Corporation, a privately held company in the business of manufacturing aircraft.  Mr. Albert held a significant interest in Fairchild Dornier Corporation from  1990, when he provided the venture capital necessary for acquiring ownership  control of the company's predecessor corporation, Fairchild Aircraft, until  April 2000 when the majority interest in the company was sold. From 1996 through  April 2000, following Fairchild Aircraft's purchase of Daimler-Benz's 80% interest  in Dornier, he was the Chairman of the Board of Directors of Fairchild Dornier  Corporation, its Chief Executive Officer and the majority stockholder. Mr. Albert  was the Chairman of the Board of Directors of Fairchild Aircraft, its Chief  Executive Officer and the majority stockholder from 1990 through 1996. From  1986 through 1989, he provided venture capital and served as the CEO or President  of a California based regional airline, West Wings Airlines, which operated  as an American Eagle franchisee until acquired by the parent of American Airlines  in 1988. Mr. Albert's business experience includes 18 years as an attorney,  specializing in business and corporate law in Los Angeles, California. He also  serves and has served as a Member of the Board of Directors of a number of privately  and publicly held corporations, including Dr. Pepper Bottling Company of California,  K & K Properties, Ozark Airlines and Tulip Corporation. Mr. Albert holds  a B.A. from UCLA in political science and an L.L.B. from the UCLA School of  Law.

LAWRENCE DIAMANT is a Director of  the Company and has served in this capacity since April 2002. He is a senior  partner of the Los Angeles based law firm Robinson, Diamant & Wolkowitz,  a professional corporation. Mr. Diamant is a member of the State Bar of California  and of the American Bar Association Business Law Section Committees on Banking  Law, Commercial Financial Services and Business Bankruptcy. He has served as  a reporter for its Ethics Task Force sub-section and currently serves as a sub-committee  vice chair on Courts, Jurisdiction, Venue and Administration. Mr. Diamant has  also served as Chairman of the Los Angeles County Bar Association Executive  Committee on Commercial Law and Bankruptcy and is a member of the Financial  Lawyers Conference. Mr. Diamant is a graduate from UCLA School of Law.

SALVADOR DIAZ-VERSON, JR. is a Director  of the Company and has served in this capacity since September 1997. Mr. Diaz-Verson  is the founder, and since 1991 has been the Chairman and President, of Diaz-Verson  Capital Investments, Inc., an Investment Adviser registered with the Securities  and Exchange Commission. Mr. Diaz-Verson served as President and Member of the  Board of Directors of American Family Corporation (AFLCAC Inc.), a publicly  held insurance holding company, from 1979 until 1991. Mr. Diaz-Verson also served  as Executive Vice President and Chief Investment Officer of American Family  Life Assurance Company, subsidiary of AFLCAC Inc., from 1976 through 1991. Mr.  Diaz-Verson is a graduate of Florida State University. He is currently a Director  of the Board of Miramar Securities, Clemente Capital Inc., Regions Bank of Georgia  and The Philippine Strategic Investment Holding Limited. Since 1992, Mr. Diaz-Verson  has also been a member of the Board of Trustees of the Christopher Columbus  Fellowship Foundation, appointed by President George Bush in 1992, and re-appointed  by President Clinton in early 2000.

JAMES  S. HARRINGTON is a Director of the Company and has served on the Board of Directors  since August 2003. Mr. Harrington has over 20 years experience in the investment  banking arena and currently is President of Public Finance Associates, LLC in  Colorado. Prior to entering investment banking, Mr. Harrington served for over  20 years in the U.S. Army. His military career included several command and  staff positions in the U.S. and overseas, with nine years in a variety of Combat  Development and R & D assignments. He is actively involved in a number  of community and political activities in Colorado, and also serves on the Board  of Trustees of the Association of Graduates at West Point. Mr. Harrington graduated  from the U.S. Military Academy at West Point in 1962, with a BS degree. He  also holds a Master of Science degree in Mechanical Engineering from the University  of Southern California and an MBA from Fairleigh Dickinson University in New  Jersey. In addition, he is a Registered Professional Engineer with registration  in Pennsylvania.

JOHN PINCAVAGE is a Director of  the Company and has served on the Board of Directors since March 2002. Mr. Pincavage  is a Chartered Financial Analyst with many years of experience on Wall Street.  Since 1999, he has been the President and founder of Pincavage & Associates,  LLC, a consulting and financial advisory firm for the aviation industry. From  1995 to 1999, he was the executive director for equity research at Warburg Dillon  Read, LLC, a Partner and Director at the Transportation Group, LLC heading research  efforts from 1989 to 1995, Executive Vice President - Research at Paine Webber  Incorporated from 1975 to 1989, and Vice President - Research at Blyth Eastman  Dillon from 1971 to 1975. Mr. Pincavage is a member of the New York Society  of Securities Analysts and has served on numerous boards including the Board  of Directors of the Virginia Engineering Foundation. He holds a Bachelor degree  in Aerospace Engineering and an MBA, both from University of Virginia.

HARRY E. SOYSTER a Director of the  Company and has served on the Board of Directors since October 2003. A retired  U.S. Army Lt. General, he currently serves as Speical Assistant to the Secretary  of the Army for WWII 60th Anniversary Observances, is on the board  of directors of several companies and the Board of Governors, Army and Navy  Club and participates in studies by the Center for Strategic and International  Studies. General Soyster joined MPRI in 1992 and was vice president for international  operations from 1995 to 2001. After his distinguished career as a field artillery  officer, General Soyster was promoted to general officer and completed his military  career in a series of intelligence assignments. Concurrently, he was the program  manager for the General Defense Intelligence Program and Defense Department  representative to the National Foreign Intelligence Board. General Soyster  graduated from the United States Military Academy with a Bachelor of Science  degree in 1957 and was commissioned in the field artillery. He also holds Master  of Science Degrees from the Pennsylvania State University in Chemistry and the  University of Southern California in Systems Management.

*Officers*

Listed below is the current Executive  Officer of the Company who is not a Director or nominee, his age, title and  background information. Executive officers serve at the discretion of the Board.

| Name       | Age    | Position                                                              |
|------------|--------|-----------------------------------------------------------------------|
|       |   |                                                                  |
| Jacob Mail | 52     | Senior Vice President - Operations        and Chief Operating Officer |

JACOB MAIL is Senior Vice President  - Operations and Chief Operating Officer. He has served in this capacity since  May 2003, prior to which he served as Senior Vice President - Operations since  1995. Mr. Mail served over 19 years at Israeli Aircraft Industries. While at  Aura, Mr. Mail has identified, negotiated and contracted all the supply chain  arrangements for the AuraGen(R). In addition, Mr. Mail implemented programs  to monitor and project needs for production schedules and provide full traceability  of all components. Mr. Mail is responsible for the implementation of the "Call  Home" programs, which provides the Company with a user database for every  AuraGen®installed in a vehicle. In addition to the manufacturing  and infrastructure implementations, Mr. Mail is also responsible for all engineering  and vehicle integration as well as sales, customer service and training. He  holds a B.S. degree in Mechanical Engineering from the Technion.

*Change in Management*

As a result of the Company's historical  losses, the SEC investigation that culminated in the resignation of the Company's  prior senior management under Zvi (Harry) Kurtzman and other factors, the Company  is in a weak financial condition. This has resulted in a substantial downsizing  of the Company's senior management. 

The Company's current Chief Operating  Officer, Jacob Mail, has been employed by the Company for over nine years.  The Company's current Chief Executive Officer, Neal Meehan, commutes and telecommutes  to the Company's headquarters. The Company's Interim Chief Financial Officer,  David Rescino, resigned in June 2004, prior to which he also telecommuted and  served on a part-time basis. Mr. Meehan is and Mr. Rescino was paid at substantially  lower rates than the rates at which their predecessors were paid. The Company  believes these arrangements are reasonable under the circumstances and more  advantageous to the Company than other available alternatives.

*Family Relationships*

None.

*Section 16(a) Beneficial Ownership  Reporting Compliance*

Section 16(a) of the Securities  Exchange Act of 1934, as amended (the "Exchange Act"), requires the  Company's officers and Directors, and beneficial owners of more than ten percent  of the common stock, to file with the Securities and Exchange Commission and  the National Association of Securities Dealers, Inc. reports of ownership and  changes in ownership of the common stock. Copies of such reports, or written  representations that no reports were required, are required to be furnished  to the Company. The Company believes that for the fiscal year ended February  29, 2004, all filing requirements applicable to its officers, directors, and  ten percent beneficial owners were satisfied. 

## ITEM 11. EXECUTIVE  COMPENSATION

*Executive Compensation*

The following table summarizes all  compensation paid during the three fiscal years ended February 29, 2004, to  the Company's Chief Executive Officer and the other executive officers during  fiscal 2004 (together, the "Named Executive Officers"). Information is presented  only for years in which an individual served as an officer of the Company.

|                                                                              |                                    | Annual Compensation | Long Term            |                                  |
|-----------------------------------------------------------------------------------|-----------------------------------------|---------------------|----------------------|---------------------------------------|
| Name and 

Principal        Position                                              | Fiscal Year        ended February 28/29 | Salary              | Other                | Compensation

Options/SARs        (1) | Other Compensation |
|                                                                              |                                    |                |                 |                                  |   |
| Neal Meehan        (2)        Chairman, Chief Executive Officer and President     | 2004                                    | $176,148            | $0                   | 6,500,000                             | $25,990 (5) |
| 2003                                                                              | $105,000                                | $0                  | 6,125,000        (4) | $45,584 (5)                           |
|                                                                              |                                    |                |                 |                                  |
| Jacob Mail

Senior Vice        President - Operations and Chief Operating Officer | 2004                                    | $164,285            | $0                   | 1,604,239                             | $        -- |
| 2003                                                                              | $173,753                                | $0                  | 514,100              | $        --                           |
| 2002                                                                              | $176,327                                | $0                  | 300,000              | $        --                           |
| David Rescino        (3)        Interim Chief Financial Officer                   | 2004                                    | $ 55,705            | $0                   | 600,000                               | $ 5,645 (5) |
| 2003                                                                              | $ 39,840                                | $0                  | -- (6)               | $16,731 (5)                           |
|                                                                              |                                    |                |                 |                                  |

(1) Amounts indicated are  number of options granted during the fiscal year.

(2) Mr. Meehan was elected  Chairman, Chief Executive Officer and President effective July 2002. 

(3) Mr. Rescino was Chief  Financial Officer from November 2002 to April 2003 and Interim Chief Financial  Officer from April 2003 to June 2004.

(4) Excludes 264,100 unexpired  option shares that were returned to the Company in fiscal 2004 for redistribution  to other employees.

(5) Represents travel and  living expenses away from home.

(6) Excludes 211,300 unexpired  option shares that were returned to the Company in fiscal 2004 for redistribution  to other employees.

No long term incentive payments  or restricted stock awards were granted to the above individuals during the  three fiscal years ended February 29, 2004. 

The following table summarizes certain  information regarding option grants to purchase common stock of the Company  to the Named Executive Officers. 

OPTIONS/SAR GRANTS IN LAST FISCAL  YEAR

|          | Individual Grants                                              |                                               |                   |              |
|---------------|----------------------------------------------------------------|----------------------------------------------------|------------------------|-------------------|
|          | Number of Securities Under-        lying Options/ SARs Granted | Options/ SARs Granted to Employee        In Fiscal | Exercise Or Base Price | Expiration        | Assumed Annual Rates of Stock        Appreciation For Option Term*

 Rates |   |
| Name          | (#)                                                            | Year                                               | ($/Sh)                 | Date              | 5% ($) | 10% ($) |
| Neal Meehan   | 6,500,000                                                      | 29.2%                                              | $0.069-0.080           | 8/20/13 - 9/25/13 | $205,600 | $587,500 |
| Jacob Mail    | 1,604,239                                                      | 7.2%                                               | $0.060                 | 8/20/13 - 9/30/13 | $        88,300 | $182,600 |
| David Rescino | 600,000                                                        | 2.7%                                               | $0.080                 | 1/30/13           | $        15,400 | $50,700 |
|               |                                                                |                                                    |                        |                   |  |  |  |  |  |

The following table summarizes certain  information regarding the number and value of all options to purchase common  stock of the Company held by the Named Executive Officers as of February 29,  2004.

AGGREGATED OPTION/SAR EXERCISES  IN LAST FISCAL YEAR  AND FISCAL YEAR-END OPTION/SAR VALUES

|          | Number        of Unexercised        Options/SARs at Fiscal        Year End | Value        of Unexercised        In-the Money Options/

SARs        at Fiscal Year End* |
|---------------|----------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|
| Name          | Exercisable                                                                | Unexercisable                                                                             | Exercisable | Unexercisable |
| Neal Meehan   | 12,875,000                                                                 | 0                                                                                         | $0 | $0 |
| Jacob Mail    | 4,068,339                                                                  | 0                                                                                         | $25,428 | $0 |
| David Rescino | 600,000                                                                    | 0                                                                                         | $0 | $0 |

* Based on the average  high and low reported prices of the Company's common stock on March 1, 2004.

No options were exercised by the  above individuals during the fiscal year ended February 29, 2004.

*Termination and Change in Control  Agreements*

The Company has the following change  in control or severance agreements with its executive officers:

-  Mr. Meehan has an employment    agreement, established in February 2004, providing for a lump sum payment    of one year's salary upon a termination of his employment for any reason other    than his commission of a felony against the Company; and
-  Mr. Mail has an employment contract    providing for payment of 3 years' salary upon a termination of his employment    without cause.

Mr. Hauser's employment contract  provided for an 18-month term and 90 days notice to terminate following expiration  of such term. Effective July 23, 2003, Mr. Hauser entered an agreement with  the Company terminating his employment and providing him a severance payment  of $175,000 to be paid over time. The Company is in default of such payments.

*Compensation of Directors*

Effective fiscal 2004, the Company's  director compensation policy is to provide each new Director an initial membership  grant of 500,000 stock options and each non-employee Director an annual grant  of 500,000 stock options (550,000 for members of the Audit and Compensation  Committees and 600,000 for the Chairperson of each committee), with the exercise  price set at or above market as of the date of grant and all grants vesting  six months plus one day from the date of grant. During fiscal 2004, all grants  under this policy were priced at the market price as of the date of grant.

During fiscal 2004, Mr. Meehan received  an additional grant of 3,000,000 options, priced at $0.08, approximately 60%  above market, Mr. Diamant received an additional grant of 1,300,000 options,  priced at $0.06, approximately 20% above market, and Mr. Albert received an  additional grant of 3,000,000 options, priced at market ($0.069). These additional  options were granted in recognition of services provided to the Company in excess  of traditional Board member duties.

Directors are reimbursed for travel  expenses incident to their service as a director but do not receive cash compensation.

*Compensation Committee Report*

The report of the Company's Compensation  Committee is:

The Company's compensation strategy  in fiscal 2004 continued to reflect the Company's extremely weak financial condition.  

In order to conserve cash, the Company  significantly reduced its senior management staff in fiscal 2002 and fiscal  2003, with the result that the Company had only three such officers during fiscal  2004. In contrast, the Company had fourteen officers at the level of vice president  or above in fiscal 2001. This consolidation of functions in a very limited staffing  has required the Company to seek out individuals who can assume broad areas  of responsibility and perform many levels of duties, all at affordable levels  of compensation.

The Company's current chief executive  officer, as well as its recently-resigned interim financial officer, were selected  as individuals who can work in this environment and address the Company's primary  needs to increase sales and obtain financing. Mr. Meehan has a strong track  record in marketing advanced technology products and Mr. Rescino has a strong  track record in serving troubled companies engaged in repetitive financing efforts.  Neither Mr. Meehan nor Mr. Rescino received signing bonuses or employment contracts  providing severance protection at the inception of their employment and each  is engaged at a salary which the Compensation Committee believes is significantly  below competitive levels.   The annual salary for the Company's Chief Executive  Officer was $153,000 after a 15% voluntary cut in pay effective January 20,  2003 through October, 2003, when it was reinstated to its prior level of $180,000  per year. Mr. Meehan was given an employment agreement, in February 2004,  providing for a lump sum payment of one year's salary upon a termination of  his employment in recognition of the fact that his success in finding the financing  required for the Company to survive could likely result in his being asked to  resign by the investor(s) providing such financing.

Mr. Meehan commutes and Mr. Rescino  commuted to the Company's principal place of business. Such commuting involves  both physical travel and extensive use of wire communications. The Compensation  Committee believes these arrangements are reasonable under the circumstances  and more advantageous to the Company than other alternatives.

As the Company's financial condition  improves, the Committee would expect to return to more standard executive compensation  arrangements with executives who would reside in the Los Angeles area.

The Company's weak financial condition,  historical losses, and other factors discussed in Management's Discussion have  also caused an extremely soft market for the Company's equity securities. The  market price of the Company's common stock has declined substantially and the  Company has stated the need to increase its authorized shares and/or implement  a reverse stock split. In addition, the Company has stated the need to attract  additional investment and that the issuance of shares in exchange for any such  investment may dilute the interests of stockholders and such dilution may be  substantial. For these reasons, stock compensation packages comparable to stock  packages previously offered by the Company do not provide the incentive necessary  to attracting and retaining qualified management. In order to provide a meaningful  stock-based incentive to its senior management, the Company has increased the  number of shares offered as stock incentives and offered short vesting provisions.  The amounts and terms of these grants are disclosed elsewhere in this Item 11.

The Compensation Committee believes  that it is in the best interest of the Company to offer further and possibly  significant stock-based compensation to its senior management (including the  Board of Directors) in order to attract and retain qualified management. Such  compensation may take the form of stock option awards, stock grants, grants  as bonuses, grants as incentive compensation, or other forms. However, other  than as set forth in this Item 11, the Company currently has no commitments  to provide additional stock-based compensation to its senior management. 

The Company's severance provisions  with its remaining senior management are disclosed elsewhere in this Item 11.

*Section 162(m) Policy*

Section 162(m) of the Internal Revenue  Code of 1986, as amended, generally provides that publicly held companies may  not deduct compensation paid to certain of its top executive officers to the  extent such compensation exceeds $1 million per officer in any year. The Company  will monitor the applicability of Section 162(m) to its ongoing compensation  arrangements as circumstances warrant. 

Salvador Diaz-Verson, Jr., Lawrence  A. Diamant and Harry E. Soyster

Aura Systems, Inc. Compensation  Committee

*Compensation Committee Interlocks  and Insider Participation*

The Compensation Committee for the  fiscal year ended February 29, 2004 comprised Salvador Diaz-Verson, Jr. and  Lawrence Diamant. Decisions regarding compensation of executive officers for  the fiscal year ended February 29, 2004 were made unanimously by the outside,  disinterested Directors of the Board of Directors, after reviewing recommendations  of the Compensation Committee and discussing the matter with the executive officer.

*Performance Graph*

The following graph compares the  cumulative total stockholder return of the Company with the cumulative total  return on the NASDAQ Stock Market Index (U.S.) and the S&P Industrial Index.  The Comparisons in the graph are required by the Securities and Exchange Commission  and are not intended to forecast or be indicative of possible future performance  of the Company's Common Stock. Total returns for the noted indexes for the  year ended February 29, 2004, have been estimated. The Company has substantially  underperformed the comparable indexes.

COMPARISON OF  FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG AURA SYSTEMS, INC., THE NASDAQ STOCK  MARKET (U.S.) INDEX AND THE S & P INDUSTRIAL INDEX

**Cumulative  Total Return**

|                |     | 1999    | 2000    | 2001   | 2002   | 2003   | 2004   |
|---------------------|----------|---------|---------|--------|--------|--------|--------|
|                |     |    |    |   |   |   |   |
| Aura Systems, Inc.  | Return % |    | -31.58  | 36.36  | -17.78 | -74.86 | -30.11 |
|                | Cum $    | $100.00 | $68.42  | $93.30 | $76.71 | $19.18 | $13.40 |
|                |     |    |    |   |   |   |   |
| S&P INDUSTRIALS | Return % |    | 17.39   | -15.99 | -8.95  | -23.24 | 36.12  |
|                | Cum $    | $100.00 | $117.39 | $98.62 | $89.80 | $68.93 | $93.83 |
|                |     |    |    |   |   |   |   |
| NASDAQ US           | Return % |    | 104.32  | -54.45 | -18.85 | -23.85 | 51.76  |
|                | Cum $    | $100.00 | $204.32 | $93.07 | $75.52 | $57.51 | $87.28 |

## ITEM 12. SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

*Common Stock*

The following table sets forth,  to the extent of the Company's knowledge, certain information regarding the  Company's Common Stock owned as of July 30, 2004 (i) by each person who is the  beneficial owner of more than five percent (5%) of its outstanding Common Stock,  (ii) by each of the Company's Directors and the Named Executive Officers, and  (iii) by all Directors and executive officers as a group:

| **Beneficial Owner**                                                                                                             | **Number of        Shares of Common Stock** | **Percent        ofCommon Stock (14)** |
|----------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------|----------------------------------------|
| Prudent Bear Funds, LLC and/or        David W. Tice & Associates (1)                                                         | 58,266,700                                  | 12.5%                                  |
| The Lancer Group (2)                                                                                                             | 50,355,168                                  | 11.4%                                  |
| James M. Simmons and/or ICM        Asset Management, Inc and/or Koyah Ventures LLC and/or Koyah Leverage        Partners, LP (3) | 40,871,803                                  | 9.2%                                   |
| Gardner Lewis Asset Management        L.P. (4)                                                                                   | 20,597,369                                  | 4.8%                                   |
| Neal Meehan (5)                                                                                                                  | 13,188,750                                  | 3.0%                                   |
| Carl Albert (6)                                                                                                                  | 8,570,893                                   | 2.0%                                   |
| Jacob Mail (7)                                                                                                                   | 4,198,378                                   | *                                      |
| Salvador Diaz-Verson, Jr.        (8)                                                                                             | 3,375,129                                   | *                                      |
| Lawrence A. Diamant (9)                                                                                                          | 3,103,779                                   | *                                      |
| James S. Harrington (10)                                                                                                         | 2,050,000                                   | *                                      |
| John Pincavage (11)                                                                                                              | 975,000                                     | *                                      |
| David Rescino (11)                                                                                                               | 600,000                                     | *                                      |
| Harry E. Soyster(11)(12)                                                                                                         | 550,000                                     | *                                      |
| All current executive officers        and Directors as a group (8 persons) (13)                                                  | 36,011,929                                  | 7.8%                                   |
|                                                                                                                             |                                             |                                        |

* Less than 1% of  outstanding shares.

(1) Based on information contained  in Schedule 13G dated December 31, 2003 as filed with the SEC by David W. Tice  & Associates, LLC and Prudent Bear Funds, Inc., 8140 Walnut Hill Lane, Suite  300, Dallas Texas. Also includes 35,662,500 shares of common stock obtainable  on conversion of 285,300 shares of Series A Convertible Redeemable Preferred  Stock. 

The above amounts do not include  shares which may be obtained upon conversion of $0.6 million principal amount  of secured contingent convertible notes issued to Prudent Bear Funds during  fiscal 2004 in exchange for new funding received by the Company. The notes were  due on June 15, 2004. The notes are convertible at the option of the holder  into new debt or equity securities of the Company at a 20% discount to the best  terms at which such new debt or equity is sold to any new investor.

Assuming the Company completes the  2004 Recapitalization Transactions as currently proposed (see Item 7 - Liquidity  and Capital Resources), the holder would be entitled to convert the notes into  approximately 31.6 million shares of common stock and approximately 7.9 million  warrants to purchase shares of common stock and would beneficially own, together  with the shares listed above, approximately 11.4% of the Company's voting securities  (before the dilutive impact of the other transactions contemplated in the 2004  Recapitalization Transactions). There can be no assurance that the Company will  be able to raise capital by completing the 2004 Recapitalizaton Transactions  or otherwise selling debt or equity securities.

(2) Based upon information contained  in Schedule 13D dated July 10, 2003 as filed with the SEC by Marty Steinberg,  Esq., as the Receiver for Lancer Management Group II, LLC, Lancer Offshore,  Inc., LSPV, LLC and Omnifund,Ltd. and as the party in control of Lancer Partners,  LP, c/o David E. Wells, Esq., Hunton & Williams, LLP, 1111 Brickell Avenue,  Suite 2500, Miami, Florida 33131. Also includes 8,313,281 shares of common stock  obtainable upon conversion of convertible notes.

(3) Based upon information contained  in Schedule 13D/A dated April 5, 2004, as filed with the SEC by ICM Asset Management,  Inc., James M. Simmons, Koyah Ventures, LLC and Koyah Leverage Partners, LP,  601 W. Main Ave, Suite 917, Spokane, Washington, 99201. ICM Asset Management,  Inc. is a registered investment advisor. ICM Asset Management, Inc. has shared  voting and dispositive power with respect to 38,976,870 common shares. Koyah  Ventures, LLC has shared voting and dispositive power with respect to 32,198,437  common shares. Koyah Leverage Partners, LP has shared voting and dispositive  power with respect to 23,454,006 common shares. The number in the chart also  includes 13,409,878 shares of common stock obtainable upon exercise of warrants  held by the Koyah entities and 1,264,125 shares of common stock obtainable upon  conversion of 10,113 shares of Series A Preferred Stock held by Raven Partners,  a limited partnership of which Koyah is general partner. James M. Simmons is  the President of ICM Asset Management, Inc. With respect to Mr. Simmons only,  includes an additional 1,431,138 shares as to which Mr. Simmons has sole voting  and dispositive power. 

The above amounts do not include  shares which may be obtained upon conversion of $6.0 million principal amount  of secured contingent convertible notes issued to Koyah during fiscal 2004 and  through June 15, 2004 in exchange for new funding received by the Company. The  notes were due on June 15, 2004. The notes are convertible at the option of  the holder into new debt or equity securities of the Company at a 20% discount  to the best terms at which such new debt or equity is sold to any new investor.

Assuming the Company completed the  2004 Recapitalization Transactions as currently proposed (see Item 7 - Liquidity  and Capital Resources), the holder would be entitled to convert the notes into  approximately 301.5 million shares of common stock and approximately 75.4 million  warrants to purchase shares of common stock and would beneficially own, together  with the shares listed above, approximately 50.8% of the Company's voting securities  (before the dilutive impact of the other transactions contemplated in the 2004  Recapitalization Transactions). There can be no assurance that the Company will  be able to raise capital by completing the 2004 Recapitalization Transactions  or otherwise selling debt or equity securities.

(4) Based upon information contained  in Schedule 13G dated February 13, 2003, as filed with the SEC by Gardner Lewis  Asset Management Inc., 285 Wilmington West Chester Pike, Chadds Ford, Pennsylvania,  19317. Of the 20,597,369 shares beneficially owned by Gardener Lewis Asset Management,  it has sole dispositive power with respect to all of these shares, sole voting  power with respect to 19,905,369 shares, and shared voting power with respect  to 338,700 shares. 

(5) Includes 13,045,000 shares which  may be purchased pursuant to options and warrants exercisable within 60 days  of July 31, 2004 and 50,000 shares held in trust or as trustee or custodian,  as to which Mr. Meehan may disclaim beneficial ownership.

(6) Includes 6,850,000 shares which  may be purchased pursuant to options and warrants exercisable within 60 days  of July 31, 2004 and 1,409,091 shares held in trust or as trustee or custodian,  as to which Mr. Albert may disclaim beneficial ownership. 

(7) Includes 4,068,339 shares which  may be purchased pursuant to options exercisable within 60 days of July 31,  2004. 

(8) Includes 1,460,000 shares which  may be purchased pursuant to options exercisable within 60 days of July 31,  2004 and 618,183 shares held in trust or as trustee or custodian, as to which  Mr. Diaz-Verson may disclaim beneficial ownership.

(9) Includes 492,046 shares held  by the firm Robinson, Diamant & Wolkowitz where Mr. Diamant is a senior  partner. Mr. Diamant disclaims beneficial ownership of these shares. Includes  2,200,000 shares which may be purchased pursuant to options within 60 days of  July 31, 2004. 

(10) Includes 550,000 shares which  may be purchased pursuant to options and warrants exercisable within 60 days  of July 31, 2004.

(11) Consists entirely of shares  which may be purchased pursuant to options and warrants exercisable within 60  days of July 31, 2004.

(12) General Soyster was elected  to the Board on October 22, 2003.

(13) Includes 29,698,339 shares  which may be purchased pursuant to options exercisable within 60 days of July  31, 2004 and 2,573,294 shares as to which the individuals may disclaim beneficial  ownership.

(14) Percent of common stock determined  by dividing the indicated number of shares beneficially owned by a stockholder  by the sum of 430,923,150 shares outstanding plus, in each case, the shares  as to which the particular stockholder has the right acquire, as indicated in  the applicable footnote.

The mailing address for the officers  and directors is c/o Aura Systems, Inc., 2335 Alaska Avenue, El Segundo, CA  90245.

| **Beneficial Owner**                                                 | **Number        of Shares of Series APreferred** | **Percent        of Series A Preferred (12)** |
|----------------------------------------------------------------------|--------------------------------------------------|-----------------------------------------------|
| Prudent Bear Funds, LLC and/or        David W. Tice & Associates | 285,300                                          | 48.3%                                         |
| Congregation Or Hachaim                                              | 159,783                                          | 27.0%                                         |
| Yair Ben-Moshe                                                       | 43,505                                           | 7.4%                                          |
| Richmond Holdings                                                    | 40,188                                           | 6.8%                                          |
| Isosceles Fund                                                       | 33,155                                           | 5.6%                                          |

 

## Item 13.  CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS

In the fourth quarter of fiscal  2002, the Company entered into a short-term loan agreement with Carl Albert  for $250,000, bearing interest at a rate of 10%. The note, which was included  in current notes payable at February 28, 2002, and accrued interest of $4,400,  was repaid in March 2002. In May 2002, Mr. Albert acquired 500,000 shares of  Common Stock from the Company for $100,000 in connection with a private placement  by the Company to a number of third party investors.

During fiscal 2003, the law firm  of Robinson, Diamant and Wolkowitz received 142,587 shares of Aura Common Stock  valued at $50,000 and 340,989 shares of Aura Common Stock valued at $109,116.38  in consideration of legal services rendered by the firm to Aura. Lawrence Diamant,  a Director of the Company, is a senior partner of this law firm. In July 2002,  Mr. Diamant acquired 50,000 shares of Common Stock from the Company for $10,000  in connection with a private placement by the Company to a number of third party  investors.

The Company entered an Agreement  for Sale and Leaseback on December 1, 2002 (the "2002 Sale/Leaseback Agreement")with  a group of individuals, (the "Purchasers") pursuant to which the Company  agreed to sell its Aura Realty, Inc. ("Aura Realty") subsidiary to  Purchasers and enter into a new 10-year lease of the properties owned by Aura  Realty. Aura Realty was a wholly-owned subsidiary of the Company whose sole  assets consist of certain real properties currently occupied by the Company  as its headquarter facilities in El Segundo, California. Of the sixteen Purchasers,  five were consultants to the Company and members of the Company's former management  who separated from the Company at the end of February 2002 (the "Consultants").  A fee of $50,000 was paid by the Company to the Consultants in connection with  the Agreement. The Company also paid to the Consultants approximately $135,000  from the funds it received at closing representing a portion of unpaid consulting  fees contractually due to the Consultants at December 1, 2002. The further  discussion of this transaction under Item 7. - Liquidity and Capital Resources  is here incorporated by reference.

During fiscal 2003, fiscal 2004  and continuing in the current fiscal year, the Company has obtained critical  financing from certain of its significant stockholders. The discussion of the  Company's capital transactions under Item 7. - *Liquidity and Capital Resources*  sets forth material terms of these financings and is here incorporated by reference.  During fiscal 2003: 12,500,000 shares of the Company's common stock were sold  to Prudent Bear Funds, LLC for $2.55 million in new funding; 3,250,000 shares  of the Company's common stock were sold to Koyah Leverage LLC for $0.65 million  in new funding; $1.13 million principal amount of 8% Notes were sold to Prudent  Bear Funds LLC for the same amount in new funding and subsequently exchanged  for Series A Preferred Stock; $0.63 million principal amount of 8% Notes were  sold to Lancer for the same amount in new funding (such notes are convertible  into common stock at prices ranging from $0.11 per share to $0.071 per share,  subject to adjustment to the average rate at which new equity is sold prior  to the time of final payment of the loan and accrued interest); and $1.0 million  of 5% Notes and $0.15 million of 5% Discounted Notes were sold to Prudent Bear  Funds, LLC. During fiscal 2003 and in March 2003, $1.23 million principal amount  of Discounted 5% Notes were sold to the Aries Group as representative for a  group of individual investors for an equal amount of new funding. The Aries  Group consists principally of former officers of the Company; Zvi (Harry) Kurtzman,  Cipora Lavut Kurtzman, Arthur Schwartz and Stephen Veen; each of these former  officers invested approximately $20,000 in this transaction. All such notes  have been exchanged for Series A Preferred Stock.

During fiscal 2004, the Company  received approximately $5.8 million****of interim funding to meet its immediate  cash needs consisting of approximately $4.7 million from Koyah Leverage Partners,  LLP and Koyah Partners, LP (funds managed by ICM Asset Management, Inc.), $0.6  million from Prudent Bear Funds, LLC and $0.48 from Edgar Appleby. These amounts,  including $0.97 million of additional notes issued between March 1, 2004 and  June 30, 2004 (the "Intercreditor Secured Debt") are evidenced by secured notes  payable on June 15, 2004 (the "Secured Notes"). The Secured Notes bear interest  at 10% per annum and are convertible at the option of the holder into new debt  or equity securities at of the Company at a 20% discount to the best terms by  which such new debt or equity is sold to any new investor. The Secured Notes  may be prepaid on notice at a 15% premium. Repayment of the Secured Notes is  secured by substantially all the assets of the Company (with limited exceptions).  Pursuant to the 2004 Recapitalization Transactions, the maturity of such notes  is to be extended to June 30, 2005, the conversion discount / prepayment premium  is to be eliminated, and a portion of such notes (initially $3.0 million of  principal and interest) are to be converted into Series B Preferred Stock. There  can be no assurance that the proposed 2004 Recapitalization Transactions will  be completed or that all of the Secured Notes will be extended or converted  as contemplated by these transactions.

In connection with the foregoing  financing, primarily as inducements to the lender to continue to provide interim  funding, the Company agreed to issue warrants to purchase an aggregate of 3,200,000  shares of common stock at a price per share of $0.11, exercisable through January  7, 2011, and additional warrants (with a net exercise feature) to purchase an  aggregate of 10,209,878 shares of common stock at a price per share of $0.024.

In May and June 2004, the Company  reached nonbinding agreements in principle with a number of parties that, if  consummated, would resolve the Company's monetary defaults on its headquarters  mortgage, settle certain litigation involving the Company and former management,  provide for additional equity at closing, provide for conversion to equity  of existing secured debt and provide for changes in the Company's senior management  and Board of Directors (together, the "2004 Recapitalization Transactions").  Participants in the 2004 Recapitalization Transactions include holders of the  Intercreditor Secured Debt and Purchasers under the 2002 Sale/Leaseback Agreement,  including the Consultants. 

# PART IV

## ITEM 14. FINANCIAL  STATEMENTS, SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS

  A.     Documents filed as part of this Form 10-K:

##### *1.       Financial Statements*

See Index to Consolidated Financial  Statements at page F-1

##### *2.      Financial Statement Schedules*

See Index to Consolidated Financial  Statements at page F-1

##### *3.      Exhibits*

See Exhibit Index

*B.     Reports on Form 8-K*

None  INDEX TO EXHIBITS

Description of Documents

| 3.1    | Restated Certificate of Incorporation        of Registrant.                                                                                                                                                                                                          |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2    | Bylaws of Registrant as amended        to date. (1)                                                                                                                                                                                                                  |
| 3.3    | Certificate of Designation        of Series A Convertible Redeemable Preferred (8)(filed as 99.3)                                                                                                                                                                    |
| 3.4    | Certificate of Eliminatons        of March 4, 2002 Series A Convertible Redeemeable Preferred Stock                                                                                                                                                                  |
| 3.5    | Certificate of Designation        of Series B Convertible Preferred Stock, dated March 26, 2004                                                                                                                                                                      |
| 3.6    | Certificate of Eliminations        of March 26, 2004 Series B Convertible Preferred Stock                                                                                                                                                                            |
| 10.1   | Aura Systems, Inc. 1987 Stock        Option Plan for Non-Employee Directors. (2)                                                                                                                                                                                     |
| 10.2   | Form of Aura Systems, Inc.        Non-Statutory Stock Option Agreement. (2)                                                                                                                                                                                          |
| 10.3   | Aura Systems, Inc. 1989 Stock        Option Plan. (3)                                                                                                                                                                                                                |
| 10.4   | Aura Systems, Inc. 2000 Stock        Option Plan (7)                                                                                                                                                                                                                 |
| 10.5   | Form of Aura Systems, Inc.,        Director Indemnification Agreement dated as of July 10, 2001. (1)(10.15)                                                                                                                                                          |
| 10.6   | Form of Agreement Regarding        Termination of Employment dated as of December 21, 2001. (1)(10.16)                                                                                                                                                               |
| 10.7   | Escrow Agreement dated as        of February 27, 2002, by and among Aura Systems, Inc. and Robinson, Diamant        & Wolkowitz, a Professional Corporation, by Lawrence A. Diamant and        Purchasers (1)(10.22)                                             |
| 10.8   | Assignment and Transfer of        Notes and Security Documents dated as of February 26, 2002, executed by        Aura Systems, Inc. and Infinity Investors Limited, et al., in favor of        Lawrence A. Diamant, as Agent for various investors. (1)(10.23)       |
| 10.9   | Assignment and Transfer of        Notes and Security Documents dated as of February 26, 2002, executed by        Aura Systems, Inc. and GSS/Array Technology Public Company, Ltd. in favor        of Lawrence A. Diamant, as Agent for various investors. (1)(10.24) |
| 10.10  | Settlement Agreement and Mutual        Release of All Claims dated as of February 26, 2002, by between Aura Systems        Inc., and Infinity Investors Limited, et al. (1)(10.25)                                                                                   |
| 10.11  | Settlement Agreement and Mutual        Release of All Claims dated as of February 26, 2002, by between Aura Systems        Inc., and GSS/Array Technology, Inc., et al. (1)(10.26)                                                                                   |
| 10.12  | Form of Aura Systems, Inc.        Subscription Agreement of May 2002 (1)(10.27)                                                                                                                                                                                      |
| 10.13  | Form of Aura Systems, Inc.        Registration Rights Agreement of May 2002 (1)(10.28)                                                                                                                                                                               |
| 10.14  | Settlement Agreement and Release        dated as of May 7, 2002, by and between Aura Systems, Inc. and CRS Emergency        Vehicles, Co. (1)(10.29)                                                                                                                 |
| 10.15  | Term Sheet dated as of February        12, 2002 (1)(10.30)                                                                                                                                                                                                           |
| 10.16  | Employment Letter to Joshua        Hauser dated February 26, 2002 (1)(10.31)                                                                                                                                                                                         |
| 10.17  | Severance agreement with Hauser        (filed as 99.4)                                                                                                                                                                                                               |
| 10.18  | Form of Convertible Note Term        Sheets (4)(10.34)                                                                                                                                                                                                               |
| 10.19  | Agreement for Sale and Leaseback        dated as of December 1, 2002. (Aura Realty transaction) (5) (10.33.1,        filed as 99.3, 99.4 and 99.5)                                                                                                                   |
| 10.20  | Lease Agreement dated as of        December 1, 2002. (Aura Realty transaction) (5)(10.33.2, filed as 99.6)                                                                                                                                                           |
| 10.21  | Additional Security Agreement        dated as of December 1, 2002. (Aura Realty transaction) (5)(10.33.3, filed        as 99.8)                                                                                                                                      |
| 10.22  | Form of Subscription Agreement        and Registration Rights Agreement (5) (10.33.4, filed as 99.9 and 99.10)                                                                                                                                                       |
| 10.23  | Pledge Agreement dated as        of December 1, 2002 (5)(10.33.4)(filed as 99.11)                                                                                                                                                                                    |
| 10.24  | Promissory Note dated as of        December 1, 2002. (Aura Realty transaction) (5)(10.33.5,filed as 99.12)                                                                                                                                                           |
| 10.25  | Form of Warrant and Registration        Rights Agreement (5)(10.33.6, filed as 99.13 and 99.14)                                                                                                                                                                      |
| 10.26  | Form of Convertible Demand        Note (5% Notes)(8)(10.26)(filed as 99.5)                                                                                                                                                                                           |
| 10.27  | Form of Convertible Demand        Note (5% Discounted Notes) (8)(10.27)(filed as 99.6)                                                                                                                                                                               |
| 10.28  | Form of Convertible Note (9)                                                                                                                                                                                                                                         |
| 10,29  | Koyah Security Agreement (9)                                                                                                                                                                                                                                         |
| 10.30  | Koyah Amendment and Waiver        Agreement (9)                                                                                                                                                                                                                      |
| 10.31  | Koyah Additional Advance Agreement        (9)                                                                                                                                                                                                                        |
| 10.32  | Warrant Amendment Agrement        dated as of January 8, 2004                                                                                                                                                                                                        |
| 10.33  | Exhibit A to Warrant Amendment        Agreement - Form of Warrant                                                                                                                                                                                                    |
| 10.34  | Intercreditor Agreement dated        as of January 19, 2004                                                                                                                                                                                                          |
| 10.35  | Form of Agreement for Loans        Under the Intercreditor Agreement                                                                                                                                                                                                 |
| 10.36  | Form of Convertible Promissory        Note for Loans Under the Intercreditor Agreement                                                                                                                                                                               |
| 10.37  | Form of Security Agreement        for Loans Under the Intercreditor Agreement                                                                                                                                                                                        |
| 10.38  | Form of Stock Pledge Agreement        for Loans Under the Intercreditor Agreement                                                                                                                                                                                    |
| 10.39  | Severance agreement letter        to Neal Meehan dated February 12, 2004                                                                                                                                                                                             |
| 10.40  | Thirteenth Amendment Agreement,dated        April 5, 2004, to Koyah lending agreements                                                                                                                                                                               |
| 10.41  | Exhibit A to Thirteenth Amendment        Agreement - Form of Warrant                                                                                                                                                                                                 |
| 10.42  | Term Sheet for the Purchase        of Real Property, dated May 25, 2004                                                                                                                                                                                              |
| 10.43  | Agreement,      dated May 28, 2004, Pertaining to the Sale/Purchase of Company Real Property                                                                                                                                                                         |
| 10.44  | Term Sheet      v10, dated June 17, 2004, for Series B Cumulative Convertible Preferred                                                                                                                                                                              |
| 10.45  | Receipt      for Series B Funding from Aries Group, dated June 24, 2004                                                                                                                                                                                              |
| 10.46  | Receipt      for Series B Funding from Aries Group, dated July 10, 2004                                                                                                                                                                                              |
| 10.47  | Receipt      for Series B Funding from Aries Group, dated August 4, 2004                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                 |
| 21     | Subsidiaries of Aura Systems,        Inc. (6)                                                                                                                                                                                                                        |
| 99.1   | CEO Certification pursuant        to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |
| 99.2   | CFO Certification pursuant        to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |
|        |                                                                                                                                                                                                                                                                 |
| (1)    | Incorporated by reference        to the referenced exhibit to the Company's Annual Report on Form 10-K        for the fiscal year ended February 28, 2002.                                                                                                           |
| (2)    | Incorporated by reference        to the referenced exhibit to the Company's Registration Statement on Form        S-1 (File No. 33-19531)                                                                                                                            |
| (3)    | Incorporated by reference        to the referenced exhibit to the Company's Registration Statement on Form        S-8 (File No. 33-32993).                                                                                                                           |
| (4)    | Incorporated by reference        to the referenced exhibit to the Company's Quarterly Report on Form 10-Q        for the period ended November 30, 2002.                                                                                                             |
| (5)    | Incorporated by reference        to the referenced exhibit to the Company's Current Report on Form 8-K        filed December 16, 2002.                                                                                                                               |
| (6)    | Incorporated by reference        to the referenced exhibit to the Company's Annual Report on Form 10-K        for the fiscal year ended February 28, 2001.                                                                                                           |
| (7)    | Incorporated by reference        to the Appendix "A" to the Company's Form 14A Proxy Statement        filed as of February 22, 2000.                                                                                                                       |
| (8)    | Incorporated by reference        to the referenced exhibit to the Company's Annual Report on Form 10-K        for the fiscal year ended February 28, 2003.                                                                                                           |
| (9)    | Incorporated by reference        to the referenced exhibit to the Company's Quarterly Report on Form 10-Q        for the period ended May 31, 2003                                                                                                                   |

Pursuant to the requirements of  Section 13 or 15 (d) 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.

AURA SYSTEMS, INC.

| Dated: | August 17, 2004                              |
|--------|----------------------------------------------|
|   |                                         |
| By:    | /s/ Neal F. Meehan                           |
|   | Neal F. Meehan                               |
|   | President and Chief Executive        Officer |

Pursuant to the requirements of  the Securities Exchange Act of 1934, this report has been signed below by the  following persons on behalf of the registrant and in the capacities and on the  date indicated.

| Signatures                                 | Title                                                                                                         | Date            |
|--------------------------------------------|---------------------------------------------------------------------------------------------------------------|-----------------|
| /s/ Neal F. Meehan                         | President, Chief Executive          Officer, Director and Chairman of the Board (Principal Executive Officer) | August 17, 2004 |
| Neal F. Meehan                             |
|                                       |                                                                                                          |            |
| /s/ Lawrence Diamant*                      | Director                                                                                                      | August 17, 2004 |
| Lawrence Diamant                           |
|                                       |                                                                                                          |            |
| /s/ Salvador Diaz-Verson,          Jr.*    | Director                                                                                                      | August 17, 2004 |
| Salvador Diaz-Verson, Jr.                  |
|                                       |                                                                                                          |            |
| /s/ Neal F. Meehan                         | Director                                                                                                      | August 17, 2004 |
| Neal F. Meehan                             |
|                                       |                                                                                                          |            |
| /s/ John Pincavage*                        | Director                                                                                                      | August 17, 2004 |
| John Pincavage                             |
|                                       |                                                                                                          |            |
| /s/ James S. Harrington*                   | Director                                                                                                      | August 17, 2004 |
| James S. Harrington                        |
|                                       |                                                                                                          |            |
| /s/ Lt. General Harry E.          Soyster* | Director                                                                                                      | August 17, 2004 |
| Lt. General Harry E. Soyster               |

* By: __/s/ Neal F. Meehan____

Neal F. Meehan, attorney-in-fact  CERTIFICATION

I, Neal F. Meehan, Chairman and  Chief Executive Officer of Aura Systems, Inc., certify that:

I have reviewed this annual report  on Form 10-K of Aura Systems, Inc. and,

Based on my knowledge, this annual  report does not contain any untrue statement of a material fact or omit to state  a material fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the period  covered by this annual report;

Based on my knowledge, the financial  statements, and other financial information included in this annual report,  fairly present in all material respects the financial condition, results of  operations and cash flows of the registrant as of, and for, the periods presented  in this annual report;

The registrant's other certifying  officers and I are responsible for establishing and maintaining disclosure controls  and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:

Designed such disclosure controls  and procedures to ensure that material information relating to the registrant,  including its consolidated subsidiaries, is made known to us by others within  those entities, particularly during the period in which this report is being  prepared;

Evaluated the effectiveness of the  registrant's disclosure controls and procedures as of a date within 90 days  prior to the filing date of this annual report (the "Evaluation Date");  and

Presented in this annual report  our conclusions about the effectiveness of the disclosure controls and procedures  based on our evaluation as of the Evaluation Date;

The registrant's other certifying  officers and I have disclosed, based on our most recent evaluation, to the registrant's  auditors and the audit committee of the registrant's board of directors (or  persons performing the equivalent function):

All significant deficiencies in  the design or operation of internal controls which could adversely affect the  registrant's ability to record, process, summarize and report financial data  and have identified for the registrant's auditors any material weaknesses in  internal controls; and

Any fraud, whether or not material,  that involves management or other employees who have a significant role in the  registrant's internal controls; and

The registrant's other certifying  officers and I have indicated in this annual report whether or not there were  significant changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses.

| By:    | /s/ Neal F. Meehan                          |
|--------|---------------------------------------------|
|   | Neal F. Meehan                              |
|   | Chairman and Chief Executive        Officer |
|   | August 17, 2004                             |

## CERTIFICATION 

I, Neal F. Meehan, Acting Chief  Financial Officer of Aura Systems, Inc., certify

that:

  1.      I have reviewed this annual report on Form  10-Q of Aura Systems, Inc. and,

  2.      Based on my knowledge, this annual report does  not contain any untrue statement of a material fact or omit to state a material  fact necessary to make the statements made, in light of the circumstances under  which such statements were made, not misleading with respect to the period covered  by this annual report;

  3.      Based on my knowledge, the financial statements,  and other financial information included in this annual report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this annual  report;

  4.      The registrant's other certifying officers  and I are responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant  and we have:

 a.        Designed such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this report is being prepared;

  b.      Evaluated the effectiveness of the registrant's  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this annual report (the "Evaluation Date"); and

  c.       Presented in this annual report our conclusions  about the effectiveness of the disclosure controls and procedures based on our  evaluation as of the Evaluation Date;

  5.      The registrant's other certifying officers  and I have disclosed, based on our most recent evaluation, to the registrant's  auditors and the audit committee of the registrant's board of directors (or  persons performing the equivalent function):

 a.        All significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant's ability to record, process, summarize  and report financial data and have identified for the registrant's auditors  any material weaknesses in internal controls; and

 b.       Any fraud, whether or not material, that involves management or other employees  who have a significant role in the registrant's internal controls; and

 6.       The registrant's other certifying officers and I have indicated in this report  whether or not there were significant changes in internal controls or in other  factors that could significantly affect internal controls subsequent to the  date of our most recent evaluation, including any corrective actions with regard  to significant deficiencies and material weaknesses.

| By:    | /s/ Neal F. Meehan             |
|--------|--------------------------------|
|   | Neal F. Meehan                 |
|   | Acting Chief Financial Officer |
|   | August 17, 2004                |

  

## Index to Consolidated  Financial Statements

| Independent Auditors'        Reports on Consolidated Financial Statements and Financial Statement Schedule                | F-1                 |
|---------------------------------------------------------------------------------------------------------------------------|---------------------|
|                                                                                                                      |                |
| Consolidated Financial        Statements of Aura Systems, Inc. and Subsidiaries:                                          |                |
|                                                                                                                      |                |
| Consolidated Balance        Sheets - February 29, 2004 and February 28, 2003                                              | F-3        to F-4   |
| Consolidated Statements        of Operations - Years ended February 29, 2004, February 28, 2003 and 2002                  | F-5                 |
| Consolidated Statements        of Stockholders' Equity - Years ended February 29, 2004, February 28,        2003 and 2002 | F-6                 |
|                                                                                                                      |                |
| Consolidated Statements        of Cash Flows - Years ended February 29, 2004, February 28, 2003 and 2002                  | F-7        to F-8   |
| Notes to Consolidated        Financial Statements                                                                         | F-9        to F-21  |
| Consolidated Financial        Statement Schedule II: Valuation and Qualifying Accounts                                    | F-22        to F-23 |

Schedules other than those  listed above are omitted because they are not required or are not applicable,  or the required information is shown in the respective consolidated financial  statements or notes thereto.

## REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors  and Stockholders 

Aura Systems, Inc. and  subsidiaries

We have audited the accompanying  consolidated balance sheets of Aura Systems, Inc. (a Delaware corporation) and  subsidiaries as of February 29, 2004 and February 28, 2003, and the related  consolidated statements of operations, stockholders' equity (deficit), and cash  flows for each of the three years in the period ended February 29, 2004. These  financial statements are the responsibility of the Company's management. Our  responsibility is to express an opinion on these financial statements based  on our audits.

We conducted our audits  in accordance with the standards of the Public Company Accounting Oversight  Board (United States). Those standards require that we plan and perform the  audit to obtain reasonable assurance about whether the financial statements  are free of material misstatement. 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 consolidated  financial statements referred to above present fairly, in all material respects,  the financial position of Aura Systems, Inc. and subsidiaries as of February  29, 2004 and February 28, 2003, and the results of their operations and their  cash flows for each of the three years in the period ended February 29, 2004  in conformity with accounting principles generally accepted in the United States  of America.

The accompanying consolidated  financial statements have been prepared assuming that the Company will continue  as a going concern. As discussed in Note 2 to the consolidated financial statements,  the Company has generated significant losses from operations and defaulted on  certain debt obligations. These factors raise substantial doubt about the Company's  ability to continue as a going concern. Management's plans in regard to these  matters are also described in Note 2. The consolidated financial statements  do not include any adjustments that might result from the outcome of this uncertainty.

SINGER LEWAK GREENBAUM  & GOLDSTEIN LLP

Los Angeles, California  

July 10, 2004

## CONSOLIDATED BALANCE  SHEETS

|                                                                                                                                                     |   | **February          29, 2004** |   | **February          28, 2003** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|--------------------------------|
|                                                                                                                                                     |   |                                |   |                                |
| ASSETS                                                                                                                                                   |   |                           |   |                           |
| Current assets                                                                                                                                           |   |                           |   |                           |
| Cash and cash equivalents                                                                                                                                |   | $          83,200              |   | $          163,693             |
| Accounts receivable,          net of allowance for doubtful accounts of $2,188,340 and $244,310                                                          |   | 682,302                        |   | 410,717                        |
| Current inventories                                                                                                                                      |   | 809,659                        |   | 1,414,500                      |
| Current portion          of notes receivable                                                                                                             |   | -                              |   | 210,272                        |
| Other current assets                                                                                                                                     |   | 259,089                        |   | 166,589                        |
|                                                                                                                                                     |   |                                |   |                                |
| Total          current assets                                                                                                                            |   | 1,834,250                      |   | 2,365,771                      |
|                                                                                                                                                     |   |                           |   |                           |
| Property, plant,          and equipment, net                                                                                                             |   | 6,939,429                      |   | 7,343,511                      |
| Non-current inventories          net of allowance for obsolete inventories of $2,032,000 and $1,678,000                                                  |   | 7,496,484                      |   | 7,573,225                      |
| Long-term investments,          net                                                                                                                      |   | 286,061                        |   | 1,000,000                      |
| Notes receivable,          net of current portion                                                                                                        |   | -                              |   | 2,006,121                      |
| Patents and trademarks,          net                                                                                                                     |   | 610,238                        |   | 2,753,603                      |
| Other assets                                                                                                                                             |   | 594,271                        |   | 725,635                        |
|                                                                                                                                                     |   |                                |   |                                |
| Total          assets                                                                                                                                    |   | $          17,760,733          |   | $          23,767,866          |
|                                                                                                                                                     |   |                                |   |                                |
|                                                                                                                                                     |   |                           |
| LIABILITIES          AND STOCKHOLDERS' EQUITY (DEFICIT)                                                                                                  |   |                           |
| Current liabilities                                                                                                                                      |   |                           |   |                           |
| Accounts payable                                                                                                                                         |   | $          2,778,366           |   | $          2,753,503           |
| Current portion          of notes payable (including $1,000,000 and $1,000,000 to related parties)                                                       |   | 4,273,052                      |   | 9,542,786                      |
| Convertible notes          payable                                                                                                                       |   | 6,400,973                      |   | 3,762,317                      |
| Accrued expenses                                                                                                                                         |   | 2,232,229                      |   | 1,772,936                      |
| Deferred income                                                                                                                                          |   | 160,875                        |   | 160,500                        |
|                                                                                                                                                     |   |                                |   |                                |
| Total          current liabilities                                                                                                                       |   | 15,845,495                     |   | 17,992,042                     |
|                                                                                                                                                     |   |                           |   |                           |
| Notes payable,          net of current portion                                                                                                           |   | 4,871,804                      |   | 40,275                         |
|                                                                                                                                                     |   |                                |   |                                |
| Total          liabilities                                                                                                                               |   | 20,717,299                     |   | 18,032,317                     |
|                                                                                                                                                     |   |                           |   |                           |
| Minority interest          in consolidated subsidiary                                                                                                    |   | 657,859                        |   | 1,023,373                      |
|                                                                                                                                                     |   |                           |   |                           |
| Commitments and          contingencies                                                                                                                   |   |                           |   |                           |
|                                                                                                                                                     |   |                           |   |                           |
| Stockholders' equity          (deficit)                                                                                                                  |   |                           |   |                           |
| Series A Convertible,          Redeemable Preferred Stock, $0.005 par value, 1,500,000 shares authorized,          591,110 shares issued and outstanding |   | 2,956                          |   | -                              |
| Common stock, $0.005          par value, 500,000,000 shares authorized 430,923,150 shares issued and          outstanding                                |   | 2,154,544                      |   | 2,154,544                      |
| Committed common          stock, 21,942,248 shares at February 29, 2004 and 13,790,924 shares          at February 28, 2003                              |   | 3,102,958                      |   | 3,102,958                      |
| Additional paid-in          capital                                                                                                                      |   | 308,530,590                    |   | 303,275,271                    |
| Accumulated deficit                                                                                                                                      |   | (317,405,473)                  |   | (303,820,597)                  |
|                                                                                                                                                     |   |                                |   |                                |
| Total          stockholders' equity (deficit)                                                                                                            |   | (3,614,425)                    |   | 4,712,176                      |
|                                                                                                                                                     |   |                                |   |                                |
| Total          liabilities and stockholders' equity (deficit)                                                                                            |   | $          17,760,733          |   | $          23,767,866          |
|                                                                                                                                                     |   |                                |   |                                |

## CONSOLIDATED STATEMENTS  OF OPERATIONS

For the Years Ended February  29, 2004, February 28, 2003 and 2002

|                                                              |   | 2004                  |   | 2003                  |   | 2002                  |
|-------------------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|-----------------------|
|                                                              |   |                       |   |                       |   |                       |
| Net revenues                                                      |   | $        1,864,325    |   | $        1,103,770    |   | $        3,116,295    |
| Cost of goods sold                                                |   | 934,769               |   | 571,099               |   | 1,480,736             |
| Inventory write down                                              |   | 550,968               |   | -                     |   | 1,510,871             |
|                                                              |   |                       |   |                       |   |                       |
| Gross profit                                                      |   | 378,588               |   | 532,671               |   | 124,688               |
|                                                              |   |                  |   |                  |   |                  |
| Operating expenses                                                |   |                  |   |                  |   |                  |
| Engineering, research        and development                      |   | 2,135,061             |   | 3,956,7876            |   | 9,224,376             |
| Selling, general,        and administrative                       |   | 7,191,925             |   | 7,374,961             |   | 10,006,844            |
| Legal settlements                                                 |   | -                     |   | 233,259               |   | (2,750,000)           |
| Adjustment to accounts        payable                             |   | -                     |   | -                     |   | (651,685)             |
| Impairment losses        on long-lived assets                     |   | 2,000,398             |   | 2,300,000             |   | 7,661,559             |
| Severance expense                                                 |   | -                     |   | 241,243               |   | 1,080,525             |
|                                                              |   |                       |   |                       |   |                       |
| Total operating expenses                                          |   | 11,327,384            |   | 14,106,349            |   | 24,571,619            |
|                                                              |   |                       |   |                       |   |                       |
| Loss from operations                                              |   | (10,948,796)          |   | (13,573,678)          |   | (24,446,931)          |
|                                                              |   |                       |   |                       |   |                       |
| Other income (expense)                                            |   |                  |   |                  |   |                  |
| Impairment of investments                                         |   | (500,000)             |   | (818,019)             |   | (1,433,835)           |
| Minority interest        in net income of consolidated subsidiary |   | 365,514               |   | (14,018)              |   | -                     |
| Loss on sale of minority        interest in Aura Realty           |   | (231,000)             |   | (626,676)             |   | -                     |
| Gain on sale of investments                                       |   | 201,061               |   | -                     |   | -                     |
| Interest expense                                                  |   | (2,409,732)           |   | (2,656,592)           |   | (2,495,551)           |
| Other income (expense),        net                                |   | (129,337)             |   | 362,096               |   | 1,549,882             |
|                                                              |   |                       |   |                       |   |                       |
| Total other income        (expense)                               |   | (2,703,494)           |   | (3,753,209)           |   | (2,379,504)           |
|                                                              |   |                       |   |                       |   |                       |
| Loss before extraordinary        item                             |   | (13,652,290)          |   | (17,326,887)          |   | (26,826,435)          |
| Extraordinary item                                                |   |                  |   |                  |   |                  |
| Gain on extinguishment        of debt, net of income taxes of $0  |   | 67,415                |   | 1,186,014             |   | 1,889,540             |
|                                                              |   |                       |   |                       |   |                       |
| Net loss                                                          |   | $        (13,584,875) |   | $        (16,140,873) |   | $        (24,936,895) |
|                                                              |   |                       |   |                       |   |                       |
| Basic and diluted        loss per share                           |   |                  |   |                  |   |                  |
| Before extraordinary        item                                  |   | $        (0.03)       |   | $        (0.05)       |   | $        (0.09)       |
| Extraordinary item                                                |   | -                     |   | 0.01                  |   | 0.01                  |
|                                                              |   |                       |   |                       |   |                       |
| Total basic and diluted        loss per share                     |   | $        (0.03)       |   | $        (0.04)       |   | $        (0.08)       |
|                                                              |   |                       |   |                       |   |                       |
| Weighted-average        shares outstanding                        |   | 430,923,150           |   | 415,863,637           |   | 327,587,590           |

## CONSOLIDATED STATEMENTS  OF STOCKHOLDERS' EQUITY

|                                                              | Series        A Preferred Stock Shares |   | Series        A Preferred Stock Shares |   | Common        Stock Shares |   | Common        Stock Amount |   | Committed        Common Stock |   | Additional        Paid-In Capital |   | Accumulated        Deficit |   | Total        Stockholders' Equity (Deficit) |
|-------------------------------------------------------------------|----------------------------------------|--------|----------------------------------------|--------|----------------------------|--------|----------------------------|--------|-------------------------------|--------|-----------------------------------|--------|----------------------------|--------|---------------------------------------------|
|                                                              |                                        |   |                                        |   |                            |   |                            |   |                               |   |                                   |   |                            |   |                                             |
| Balance, February        28, 2001                                 |                                   |   | $        -                             |   | 291,089,582                |   | $        1,455,394         |   | $        -                    |   | $263,332,470                      |   | $(262,742,829)             |   | $        2,045,035                          |
| Issuance of common        stock                                   |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| in private placements                                             |                                   |   |                                   |   | 37,650,782                 |   | 188,237                    |   |                          |   | 13,215,876                        |   |                       |   | 13,404,113                                  |
| for conversion of        notes payable                            |                                   |   |                                   |   | 31,398,771                 |   | 156,994                    |   |                          |   | 11,706,261                        |   |                       |   | 11,863,255                                  |
| to satisfy liabilities                                            |                                   |   |                                   |   | 18,500,802                 |   | 92,504                     |   |                          |   | 6,921,208                         |   |                       |   | 7,013,712                                   |
| for exercise of        stock options and warrants                 |                                   |   |                                   |   | 102,500                    |   | 512                        |   |                          |   | 27,263                            |   |                       |   | 27,775                                      |
| for re-pricing requirements                                       |                                   |   |                                   |   | 8,947,631                  |   | 44,738                     |   |                          |   | (44,738)                          |   |                       |   | -                                           |
| Offering costs                                                    |                                   |   |                                   |   |                       |   |                       |   |                          |   | (74,912)                          |   |                       |   | (74,912)                                    |
| Committed common        stock recorded under repricing agreements |                                   |   |                                   |   |                       |   |                       |   | 3,310,650                     |   |                              |   |                       |   | 3,310,650                                   |
| Net loss                                                          |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   | (24,936,895)               |   | (24,936,895)                                |
|                                                              |                                        |   |                                        |   |                            |   |                            |   |                               |   |                                   |   |                            |   |                                             |
| Balance, February        28, 2002                                 |                                   |   |                                   |   | 387,690,068                |   | 1,938,379                  |   | 3,310,650                     |   | 295,083,428                       |   | (287,679,724)              |   | 12,652,733                                  |
|                                                              |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| Issuance of common        stock                                   |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| in private placements                                             |                                   |   |                                   |   | 41,700,830                 |   | 208,504                    |   |                          |   | 5,485,497                         |   |                       |   | 5,694,001                                   |
| from committed stock                                              |                                   |   |                                   |   | 923,077                    |   | 4,615                      |   | (207,692)                     |   | 203,077                           |   |                       |   | -                                           |
| to satisfy liabilities                                            |                                   |   |                                   |   | 659,175                    |   | 3,296                      |   |                          |   | 166,444                           |   |                       |   | 169,740                                     |
|                                                              |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| Common stock returned                                             |                                   |   |                                   |   | (50,000)                   |   | (250)                      |   |                          |   | (29,750)                          |        |                       |   | (30,000)                                    |
| Beneficial conversion        feature on convertible notes payable |                                   |   |                                   |   |                       |   |                       |   |                          |   | 1,484,837                         |   |                       |   | 1,484,837                                   |
| Issuance of stock        options                                  |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| as compensation        expense                                    |                                   |   |                                   |   |                       |   |                       |   |                          |   | 53,076                            |   |                       |   | 53,076                                      |
| as consulting expense                                             |                                   |   |                                   |   |                       |   |                       |   |                          |   | 192,404                           |   |                       |   | 192,404                                     |
| Issuance of warrants                                              |                                   |   |                                   |   |                       |   |                       |   |                          |   | 659,321                           |   |                       |   | 659,321                                     |
| Offering costs                                                    |                                   |   |                                   |   |                       |   |                       |   |                          |   | (23,063)                          |   |                       |   | (23,063)                                    |
| Net loss                                                          |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   | (16,140,873)               |   | (16,140,873)                                |
|                                                              |                                        |   |                                        |   |                            |   |                            |   |                               |   |                                   |   |                            |   |                                             |
| Balance, February        28, 2003                                 |                                   |   |                                   |   | 430,923,150                |   | 2,154,544                  |   | 3,102,958                     |   | 303,275,271                       |   | (303,820,597)              |   | $        4,712,176                          |
|                                                              |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| Warrants      issued to debtholders                               |                                   |   |                                   |   |                       |   |                       |   |                          |   | 494,265                           |   |                       |   | 494,265                                     |
| Beneficial conversion        feature on convertible notes payable |                                   |   |                                   |   |                       |   |                       |   |                          |   | 827,375                           |   |                       |   | 827,375                                     |
| Issuance of Series        A Preferred Stock                       |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| in private placements                                             | 57,090                                 |   | 285                                    |   |                       |   |                       |   |                          |   | 259,215                           |   |                       |   | 259,500                                     |
| for conversion of        notes payable                            | 534,020                                |   | 2,671                                  |   |                       |   |                       |   |                          |   | 3,674,464                         |   |                       |   | 3,677,135                                   |
| Issuance of stock        options                                  |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| as compensation        expense                                    |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| as consulting expense                                             |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| Issuance of warrants                                              |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   |                       |   |                                        |
| Net loss                                                          |                                   |   |                                   |   |                       |   |                       |   |                          |   |                              |   | (13,584,875)               |   | (13,584,875)                                |
|                                                              |                                        |   |                                        |   |                            |   |                            |   |                               |   |                                   |   |                            |   |                                             |
| Balance, February        29, 2004                                 | 591,110                                |   | $        2,956                         |   | 430,923,150                |   | $        2,154,544         |   | $        3,102,958            |   | $308,530,590                      |   | $(317,405,473)             |   | $(3,614,425)                                |
|                                                              |                                        |   |                                        |   |                            |   |                            |   |                               |   |                                   |   |                            |   |                                             |

## CONSOLIDATED STATEMENTS  OF CASH FLOWS   For the Years Ended February 29, 2004, February 28, 2003 and 2002

|                                                                                                                           |   | 2004          |   | 2003          |   | 2002          |
|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------|--------|---------------|--------|---------------|
|                                                                                                                           |   |               |   |               |   |               |
| Cash flows from operating        activities                                                                                    |   |          |   |          |   |          |
| Net loss                                                                                                                       |   | $(13,584,876) |        | $(16,140,873) |        | $(24,936,895) |
| Adjustments to reconcile        net loss to net cash used in operating activities                                              |   |          |   |          |   |          |
| Depreciation and        amortization                                                                                           |   | 571,734       |   | 966,852       |   | 5,868,089     |
| (Gain) loss on disposition        of assets                                                                                    |   | (201,061)     |   | 21,348        |   | 65,823        |
| Loss on sale of minority        interest Aura Realty                                                                           |   | 231,000       |   | 626,676       |   | -             |
| Change in allowance        for doubtful accounts                                                                               |   | -             |   | 94,310        |   | -             |
| Reserve      for Note Receivable                                                                                               |        | 2,042,340     |        |               |        |               |
| Change in reserve        for inventory obsolescence                                                                            |   | 550,968       |   | (117,411)     |   | 1,510,871     |
| Impairment of long-lived        assets and investments                                                                         |   | 2,500,397     |   | 3,118,019     |   | 9,095,394     |
| Gain on extinguishment        of debt                                                                                          |   | (65,594)      |   | (1,186,014)   |   | (1,889,540)   |
| Minority interest        in net income of consolidated subsidiary                                                              |   | (365,514)     |   | 14,018        |   | -             |
| Stock options issued        as compensation expense                                                                            |   | -             |   | 53,075        |   | -             |
| Stock options issued        as consulting expense                                                                              |   | -             |   | 192,404       |   | -             |
| Beneficial conversion        feature on convertible debt                                                                       |   | 1,090,639     |   | 1,484,837     |   | -             |
| Adjustment to accounts        payable                                                                                          |   | -             |   | -             |   | (651,685)     |
| Adjustments to legal        settlements                                                                                        |   | -             |   | -             |   | (750,000)     |
| Operating expenses        satisfied with stock                                                                                 |   | -             |   | 169,740       |   | 278,801       |
| (Increase) decrease        in                                                                                                  |   |          |   |          |   |          |
| Accounts receivable                                                                                                            |   | (271,585)     |   | (437,534)     |   | 965,700       |
| Inventories                                                                                                                    |   | 130,614       |   | 636,110       |   | (1,260,896)   |
| Other current assets                                                                                                           |   | (92,500)      |   | 62,169        |   | 224,182       |
| Other assets                                                                                                                   |   | 131,364       |   | (562,265)     |   | (4,300)       |
| Increase (decrease)        in                                                                                                  |   |          |   |          |   |          |
| Accounts payable        and accrued expenses, net of effect of settlements and sale of minority        interest in Aura Realty |   | 609,437       |   | 1,063,477     |   | 2,744,148     |
| Deferred income                                                                                                                |   | 375           |   | 160,500       |   | -             |
|                                                                                                                           |   |               |   |               |   |               |
| Net cash used in        operating activities                                                                                   |   | (6,722,272)   |   | (9,780,562)   |   | (8,740,308)   |
|                                                                                                                           |   |               |   |               |   |               |
| Cash flows from investing        activities                                                                                    |   |          |   |          |   |          |
| Payments received        on notes receivable                                                                                   |   | 174,053       |   | 181,725       |   | 155,857       |
| Purchase of property,        plant, and equipment                                                                              |   | (24,684)      |   | (6,491)       |   | (255,733)     |
| Proceeds from disposal        of property, plant, and equipment                                                                |   | -             |   | 57,591        |   | -             |
| Proceeds from sale        of investments                                                                                       |   | 415,000       |   | -             |   | -             |
| Proceeds from sale        of minority interest in Aura Realty                                                                  |   | -             |   | 1,463,000     |   | -             |
|                                                                                                                           |   |               |   |               |   |               |
| Net cash provided        by (used in) investing activities                                                                     |   | 564,369       |   | 1,695,825     |   | (99,876)      |
|                                                                                                                           |   |               |   |               |   |               |

## CONSOLIDATED STATEMENTS  OF CASH FLOWS

|                                                             | 2004       |   | 2003               |   | 2002               |
|------------------------------------------------------------------|------------|--------|--------------------|--------|--------------------|
|                                                             |            |   |                    |   |                    |
| Cash flows from financing        activities                      |       |   |               |   |               |
| Proceeds from notes        payable and convertible notes payable | $6,366,080 |   | $        2,510,746 |   | $        500,000   |
| Payments on notes        payable                                 | (548,170)  |   | (1,046,650)        |   | (5,139,308)        |
| Net proceeds from        issuance of preferred stock             | 259,500    |   |               |   |               |
| Net proceeds from        issuance of common stock                | -          |   | 5,640,938          |   | 13,329,201         |
| Proceeds from exercise        of stock options                   | -          |   | -                  |   | 775                |
| Net proceeds from        exercise of warrants                    | -          |   | -                  |   | 27,000             |
|                                                             |            |   |                    |   |                    |
| Net cash provided        by financing activities                 | 6,077,410  |   | 7,105,034          |   | 8,717,668          |
|                                                             |            |   |                    |   |                    |
| Net increase (decrease)        in cash and cash equivalents      | (80,493)   |   | (979,703)          |   | (122,516)          |
| Cash and cash equivalents,        beginning of year              | 163,693    |   | 1,143,396          |   | 1,265,912          |
|                                                             |            |   |                    |   |                    |
| Cash and cash equivalents,        end of year                    | 83,200     |   | $        163,693   |   | $        1,143,396 |
|                                                             |            |   |                    |   |                    |
| Supplemental disclosures        of cash flow information         |       |   |               |   |               |
| Interest paid                                                    | $324,872   |   | $        621,047   |   | $        1,081,122 |
|                                                             |            |   |                    |   |                    |
| Income taxes paid                                                | $ -        |   | $ -                |   | $        -         |
|                                                             |            |   |                    |   |                    |

Supplemental schedule of  non-cash financing and investing activities

During the year ended February  29, 2004, the Company:

-     issued $125,811 of  convertible notes payable in satisfaction of $125,811 in contractual obligations  arising from the sale of the convertible notes payable.

During the year ended February  28, 2003, the Company:

 -           issued 659,175 shares of common stock in satisfaction of $169,740 in  liabilities and contractual obligations.

 -           issued 923,077 shares of common stock that were committed at February  28, 2002 valued at $207,692.

During the year ended February  28, 2002, the Company:

 -           restructured $16,179,900 of debt and related accrued interest into 31,398,771shares  of common stock valued at $15,173,905, resulting in a pre-tax extraordinary  gain for the early extinguishment of debt of $1,005,995. An additional 14,714,000  of the common shares (related to guaranteed share re-pricing agreements), with  a value totaling $3,310,650 were not issued as of February 28, 2002 and have  been reflected on the consolidated Statement of Stockholders' equity as committed  common stock (923,077 of such shares were issued in fiscal 2003). The gain,  in addition to an $883,846 gain resulting from a creditor's forgiveness of the  remaining balance of an unsecured note payable plus accrued interest, has been  reflected as an extraordinary item in the accompanying consolidated financial  statements.

 -           issued 8,500,502 shares of common stock in satisfaction of $278,801  in operating expenses and $2,734,613 of liabilities, of which $1,416,364 was  long-term trade debt included in notes payable and other liabilities; 10,000,000  shares of common stock valued at $4,000,000 as partial settlement with Deutsche  Financial Services (see Note 10); 8,947,631 shares of common stock for re-pricing  a prior year private placement, and 1,743,801 shares of common stock as a finder's  fee for a current year private placement. The finder's fee and re-pricing did  not have any effect on total stockholders' equity.

## NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS

### NOTE 1 - ORGANIZATION  AND OPERATIONS

### General

Aura Systems, Inc., ("Aura"  or the "Company") a Delaware corporation, was founded to engage in  the development, commercialization, and sales of products, systems, and components,  using its patented and proprietary electromagnetic and electro-optical technology.  Aura develops and sells AuraGen® mobile induction power systems to  the industrial, commercial, and defense mobile power generation markets. In  addition, the Company holds patents for other technologies that have not been  commercially exploited. 

### NOTE 2 - GOING CONCERN

The accompanying consolidated  financial statements of the Company have been prepared on the basis that it  is a going concern, which contemplates the realization of assets and satisfaction  of liabilities in the normal course of business. However, as a result of the  Company's losses from operations and its default on certain of its obligations  (see Note 9), there is substantial doubt about its ability to continue as a  going concern. The 2004 Recapitalization Transactions (see Note 18) are intended  to provide the Company a firm financial base, however, there can be no assurance  that they will be consummated and it is likely that the Company will need additional  funding beyond the preliminary commitments the Company has received. Failure  to obtain such additional financing when and in the amounts needed could require  the Company to cease operations. 

The Company's long-term  ability to continue as a going concern is dependent upon the successful achievement  of profitable operations and the ability to generate sufficient cash from operations  and financing sources to meet the the Company's obligations. The consolidated  financial statements do not include any adjustments to reflect the possible  future effects on the recoverability and classification of assets or the amount  and classification of liabilities that may result from the possible inability  of the Company to continue as a going concern. The Company's consolidation and  reduction of the scope of its operations has resulted in writedowns of assets.  Further writedowns may occur and would occur were the Company to cease operations.  

### NOTE 3 - SUMMARY OF SIGNIFICANT  ACCOUNTING POLICIES

### Principles of Consolidation

The consolidated financial  statements include the accounts of Aura and subsidiary, Aura Realty, Inc. (see  Note 4). Investments in affiliated companies are accounted for by the equity  or cost method, as appropriate. Significant inter-company amounts and transactions  have been eliminated in consolidation.

### Revenue Recognition

The Company recognizes  revenue for product sales upon shipment and when title is transferred to the  customer. When Aura performs the installation of the product, revenue and cost  of sales are recognized when the installation is complete. The Company has in  the past earned a portion of its revenues from license fees and recorded those  fees as income when the Company fulfilled its obligations under the particular  agreement.

### Comprehensive Income

The Company utilizes Statement  of Financial Accounting Standards ("SFAS") No. 130, "Reporting  Comprehensive Income." This statement establishes standards for reporting  comprehensive income and its components in a financial statement. Comprehensive  income as defined includes all changes in equity (net assets) during a period  from non-owner sources. Examples of items to be included in comprehensive income,  which are excluded from net income, include foreign currency translation adjustments  and unrealized gains and losses on available-for-sale securities. Comprehensive  income is not presented in the Company's financial statements since the Company  did not have any of the items of comprehensive income in any period presented.

### Cash and Cash Equivalents

Cash and cash equivalents  consist of cash on hand and in banks. The Company maintains its cash deposits  at several banks located throughout the United States. Deposits at each bank  are insured by the Federal Deposit Insurance Corporation up to $100,000. As  of February 29, 2004 and February 28, 2003, uninsured portions of the balances  at those banks aggregated to $0 and $28,999, respectively. The Company has not  experienced any losses in such accounts and believes it is not exposed to any  significant risk on cash and cash equivalents.

### Accounts Receivable

Accounts receivable consist  primarily of amounts due from customers. The Company has provided for an allowance  for doubtful accounts, which management believes to be sufficient to account  for all uncollectible amounts.

### Inventories

Inventories are valued  at the lower of cost (first-in, first-out) or market. Due to continuing lower  than projected sales, the Company is holding inventories in excess of what it  expects to sell in the next fiscal year. As of February 29, 2004 and February  28, 2003, $7,496,484 and $7,573,225, respectively, of inventories have been  classified as long-term assets. See Note 5.

### Property, Plant, and Equipment

Property, plant, and equipment,  including leasehold improvements, are recorded at cost, less accumulated depreciation  and amortization. Depreciation is provided using the straight-line method over  the estimated useful lives of the respective assets as follows:

| Buildings               | 40 years      |
|-------------------------|---------------|
| Machinery and equipment | 5 to 10 years |
| Furniture and fixtures  | 7 years       |

Improvements to leased  property are amortized over the lesser of the life of the lease or the life  of the improvements. Amortization expense on assets acquired under capital leases  is included with depreciation and amortization expense on owned assets.

Maintenance and minor replacements  are charged to expense as incurred. Gains and losses on disposals are included  in the results of operations.

### Long-Term Investments

The Company accounts for  all investments where it holds less than a 20% voting interest, cannot exercise  significant influence, and where the fair market value of those securities is  not readily determinable under the cost basis. Investments in voting interests  between 20% and 50% where the Company can exercise significant influence are  accounted for under the equity method of accounting, and investments greater  than 50% are generally consolidated for the purposes of financial reporting.   As the Company does not hold a sufficient interest in its investments to exercise  significant influence and the fair market value of the investments are not readily  determinable, long-term investments have been accounted for under the cost method.  A decline in the value of any investment below cost that is deemed other than  temporary is charged to earnings.

### Patents and Trademarks

The Company capitalizes  the costs of obtaining or acquiring patents and trademarks. Amortization of  patent and trademark costs is provided for by the straight-line method over  the shorter of the legal or estimated economic life. Amortization expense was  $187,028, $308,329, and $308,329 for the years ended February 29, 2004, February  28, 2003 and 2002, respectively. Accumulated amortization was $694,295 and $2,272,787  as of February 29, 2004 and February 28, 2003, respectively. If a patent or  trademark is rejected, abandoned, or otherwise invalidated, the unamortized  cost is expensed in that period. During fiscal 2004, the Company recorded a  $2,000,398 long-lived asset impairment charge resulting from the write off of  some of the Company's patents and trademarks.  The Company reevaluated its intentions  with regard to its patents and trademarks related to products outside its core  business and wrote-off the carrying value of patents not related to products  in production.  The Company expects to recognize $65,728 of amortization expense  on its remaining patents for each of the next five years.

### Valuation of Long-Lived  Assets

The Company reviews long-lived  assets and identifiable intangibles in accordance with SFAS No. 144, "Accounting  for the Impairment or Disposal of Long-Lived Assets," on at least an annual  basis or whenever events or circumstances indicate that the carrying amount  of such assets may not be fully recoverable. During the years ended February  29, 2004 and February 28, 2003 and 2002, the Company recorded asset impairment  charges on certain of its long-lived assets (see Note 7 and Note 18).

### Stock-Based Compensation

SFAS No. 123, "Accounting  for Stock-Based Compensation," establishes and encourages the use of the  fair value based method of accounting for stock-based compensation arrangements  under which compensation cost is determined using the fair value of stock-based  compensation determined as of the date of grant and is recognized over the periods  in which the related services are rendered. The statement also permits companies  to elect to continue using the current implicit value accounting method specified  in Accounting Principles Board ("APB") Opinion No. 25, "Accounting  for Stock Issued to Employees," to account for stock-based compensation.  The Company has elected to use the implicit value based method and to disclose  the pro forma effect of using the fair value based method to account for its  stock-based compensation.

If the Company had elected  to recognize compensation expense based upon the fair value at the grant date  for awards under this plan consistent with the methodology prescribed by SFAS  No. 123, the Company's net loss and loss per share would be reduced to the pro  forma amounts indicated below for the years ended February 29, 2004 and February  28, 2003 and 2002: 

|                                                                                                             | 2004            |   | 2003            |   | 2002            |
|------------------------------------------------------------------------------------------------------------------|-----------------|--------|-----------------|--------|-----------------|
|                                                                                                             |                 |   |                 |   |                 |
| Net loss, As reported                                                                                            | $(13,738,258)   |   | $(16,140,873)   |   | $(24,936,895)   |
| Intrinsic value expense                                                                                          | -               |   | 53,076          |   | -               |
| Stock-based employee        compensation expense determined under fair value presentation for all        options | (1,965,275)     |   | (2,224,102)     |   | (1,431,821)     |
|                                                                                                             |                 |   |                 |   |                 |
| Pro forma net loss                                                                                               | $(15,703,533)   |   | $(18,311,899)   |   | $(26,368,716)   |
|                                                                                                             |                 |   |                 |   |                 |
| Basic loss per common        share:                                                                              |            |   |            |   |            |
| As reported                                                                                                      | $        (0.03) |   | $        (0.04) |   | $        (0.08) |
| Pro forma                                                                                                        | $        (0.04) |   | $        (0.04) |   | $        (0.08) |

For purposes of computing  the pro forma disclosures required by SFAS No. 123, the fair value of each option  granted to employees and directors is estimated using the Black-Scholes option-pricing  model with the following weighted-average assumptions for the years ended February  29, 2004, February 28, 2003 and 2002: dividend yields of 0%, 0%, and 0%, respectively;  expected volatility of 120%, 98% and 70%, respectively; risk-free interest rates  of 1.7%, 2.3% and 4.9%, respectively; and expected lives of 2.0, 2.0 and 2.14  years, respectively.

The weighted-average fair  value of options granted in fiscal 2004 was $0.040, and the weighted-average  exercise price was $0.065.

The Black-Scholes option  valuation model was developed for use in estimating the fair value of traded  options which do not have vesting restrictions and are fully transferable. In  addition, option valuation models require the input of highly subjective assumptions,  including the expected stock price volatility. Because the Company's employee  stock options have characteristics significantly different from those of traded  options, and because changes in the subjective input assumptions can materially  affect the fair value estimate, in management's opinion, the existing models  do not necessarily provide a reliable single measure of the fair value of its  employee stock options.

### Fair Value of Financial  Instruments

The Company's financial  instruments include cash and cash equivalents, accounts receivable, notes receivable,  long-term investments, accounts payable, and accrued expenses. The carrying  amounts of these instruments approximate their fair value due to their short  maturities.

### Minority Interest

Minority interest represents  the proportionate share of the equity of the consolidated subsidiary owned by  the Company's minority stockholders in that subsidiary.

### Advertising Expense

Advertising costs are charged  to expense as incurred and were immaterial for the years ended February 29,  2004, February 28, 2003 and 2002.

### Research and Development  

Research and development  costs are expensed as incurred.

### Income Taxes

The Company utilizes SFAS  No. 109, "Accounting for Income Taxes," which requires the recognition  of deferred tax assets and liabilities for the expected future tax consequences  of events that have been included in the financial statements or tax returns.  Under this method, deferred income taxes are recognized for the tax consequences  in future years of differences between the tax bases of assets and liabilities  and their financial reporting amounts at each period end based on enacted tax  laws and statutory tax rates applicable to the periods in which the differences  are expected to affect taxable income. Valuation allowances are established,  when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company has significant  income tax net operating losses; however, due to the uncertainty of the realizability  of the related deferred tax asset, a reserve equal to the amount of deferred  income taxes has been established at February 29, 2004 and February 28, 2003.

### Loss per Share

The consolidated net loss  per common share is based on the weighted-average number of common shares outstanding  during the year. Common share equivalents have been excluded since inclusion  would dilute the reported loss per share.

### Estimates

The preparation of financial  statements 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 financial statements and the reported  amounts of revenue and expenses during the reporting period. Actual results  could differ from those estimates.

### Major Customers

During the year ended February  29, 2004, the Company conducted business with three customers whose sales comprised  of 58% of net sales. As of February 29, 2004, three customers accounted for  52% of total accounts receivable. During the year ended February 28, 2003, the  Company conducted business with one customer whose sales comprised of 22% of  net sales. As of February 28, 2003, three customers accounted for 61% of total  accounts receivable. 

### Recently Issued  Accounting Pronouncements

In December 2003, the FASB  issued FASB Interpretation No. 46, "Consolidation of Variable Interest  Entities," an interpretation of Accounting Research Bulletin No. 51, "Consolidated  Financial Statements." This pronouncement requires the consolidation of  variable interest entities, as defined, and is effective immediately for variable  interest entities created after January 31, 2003, and for variable interest  entities in which an enterprise obtains an interest after that date. The Company  does not have any variable interest entities, and therefore, this interpretation  is not expected to have a material impact on the Company's financial statements.

### NOTE 4 - SALE OF AURA  REALTY

On December 1, 2002, the  Company consummated the initial closing under an Agreement for Sale and Leaseback,  (together with the agreements contemplated thereby, the "Agreement")  with a group of individuals (the "Purchasers") pursuant to which the  Company agreed to sell its Aura Realty, Inc. ("Aura Realty") subsidiary  to the Purchasers and enter into a new 10-year lease of the properties owned  by Aura Realty (the "Lease").

The Agreement provides  for the $7,350,000 purchase price for the Aura Realty stock, arrived at in arm's  length negotiations, to be partially funded by Purchasers' assumption or refinancing  of the current mortgage note secured by the properties. Net of the principal  balance of this mortgage note of approximately $5,083,000, certain security  deposits and prepayments totaling $564,000, the partial payment of past due  amounts owed to certain of the individual purchasers, as described below, of  approximately $135,000, and Purchasers' fees of $105,000, the Company received  approximately $1,463,000. $878,750 of this amount was advanced to the Company  by the Purchasers prior to the December 1, 2002 closing under the Agreement.

At the December 1, 2002  closing under the Agreement, the Company transferred 49.9% of its stock in Aura  Realty to the Purchasers, delivered a $1,000,000 note payable to the Purchasers  (the "Aura Note"), and granted the Purchasers a security interest in the Ceramic  Note (see Note 6) to secure certain aspects of its performance under the Agreement  and the Lease.  A second closing was to occur after the current mortgage note  holder consented to transfer the stock to the Purchasers and executed the Lease.

At that time, the Company  was to deliver its remaining Aura Realty stock to the Purchasers in exchange  for the return and cancellation of the Aura Note. If the current mortgage note  holder did not consent to the transfer of the stock to the Purchasers and execution  of the Lease, the Purchasers were to obtain a substitute mortgage note through  a refinancing. In the event that such a refinancing is required, the Company  would be required to pay certain additional costs.

In connection with the  sale, the Purchasers also received warrants to purchase 15,000,000 shares of  common stock of the Company within five years from December 1, 2002 at exercise  prices ranging from $0.15 to $0.25 per share. The value of the warrants was  calculated at $659,321 using the Black-Scholes method of valuation. In addition,  the Purchasers subscribed to purchase 21,366,347 shares of the Company's common  stock for approximately $1. The Company is required to issue 8,151,324 additional  shares of common stock and has issued, in fiscal 2004, warrants to purchase  5,500,000 shares of common stock to the Purchasers because of its failure to  register the shares for resale (see Note 12). The additional warrants were valued  at $231,000 using the Black-Scholes pricing model and have been recorded, in  fiscal 2004, as an additional loss on the sale of the minority interest in Aura  Realty.

Of the 16 Purchasers, five  were members of the Company's former management, who separated from the Company  at the end of February 2002 (the "Former Management"). The Company  paid a fee of $50,000 to the Former Management in connection with the Agreement.  The Company also paid to the Former Management approximately $135,000 from the  funds it received at closing, representing a portion of unpaid severance contractually  due at December 1, 2002 per the Former Management's separation agreements (see  Note 15).

The assets and liabilities  of Aura Realty at February 29, 2004 and February 28, 2003 consisted of the following:

|                                 | 2004                 |   | 2003                 |
|--------------------------------------|----------------------|--------|----------------------|
|                                 |                      |   |                      |
| Current assets                       | $          21,673    |   | $          26,112    |
| Property and equipment,          net | 6,672,583            |   | 6,892,692            |
| Other assets                         | 108,165              |   | 133,617              |
|                                 |                      |   |                      |
| Total assets                         | $          6,802,421 |   | $          7,052,421 |
|                                 |                      |   |                      |
| Total liabilities                    | $          5,473,973 |   | $          4,952,357 |
|                                 |                      |   |                      |
| Total equity                         | $          1,328,448 |   | $          2,100,064 |
|                                 |                      |   |                      |

The Company originally  recorded and reported this transaction as a sale of 100% of its Aura Realty  subsidiary. The events subsequent to February 28, 2003 raised significant doubt  that the remainder of the transaction contemplated by the Agreement would ever  be completed. As a result, the Company has effectively sold a 49.9% interest  in Aura Realty. The Purchasers' interest in Aura Realty has been recorded as  minority interest in consolidated subsidiary, and the minority interest in net  income of consolidated subsidiary has been classified as such on the accompanying  statement of operations for the period applicable.

The loss on the sale of  a minority interest in the Aura Realty subsidiary recorded in fiscal 2003 is  calculated as follows:

| Net cash received                                                           | $          1,463,000 |
|-----------------------------------------------------------------------------|----------------------|
| Deposits held back          by the Purchasers                               | 564,000              |
| Fees                                                                        | 105,000              |
| Less execution          of note payable                                     | (1,000,000)          |
|                                                                        |                      |
| Total sale price                                                            | 1,132,000            |
| Value of warrants          issued                                           | (659,321)            |
| Net book value          of minority interest in Aura Realty at date of sale | (1,099,355)          |
|                                                                        |                      |
| Loss on sale of          minority interest in Aura Realty                   | $          (626,676) |
|                                                                        |                      |

In June 2003, the mortgage  note holder had not consented to the transaction, and Aura failed to make certain  payments to the Purchasers as required under the Agreement. At that time, the  Company entered into a forbearance agreement with the Purchasers which requires  the Company to:

1.   Use its best efforts  to effect a registration of all warrants previously issued to the Purchasers  per the Agreement;

2.   Execute and deliver  an assignment of its interest in the Alpha Ceramic Note (see Note 6) to the  Purchasers;

3.   Enter into an exclusive  listing agreement for the sale of it real estate property; and

4.   Take necessary action  to stop the pending foreclosure and arrange for payment of any arrearages under  the mortgage.

In June 2004, the Company  paid the remaining arrearages under the mortgage note, which cured the defaults  and halted the foreclosure proceedings. The Aura Note became due and payable  per its terms on May 31, 2004. As of July 31, 2004, Aura had not paid the Aura  Note and the Purchasers had not presented a formal demand for payment / notice  of default. In conjunction with the 2004 Recapitalization Agreements, the Company  is currently in negotiations with the Purchasers to approve a sale of the buildings  to different purchasers, which would, among other things, terminate the Company's  obligations under the Agreement including payment of the Aura Note (see Note  18). There can be no guarantee that the Company and the Purchasers will reach  an agreement, in which case, the Company's obligations under the Agreement and  the Aura Note would continue.

### NOTE 5 - INVENTORIES

Inventories at February  29, 2004 and February 28, 2003 consisted of the following:

|                                                | 2004                 |   | 2003                 |
|-----------------------------------------------------|----------------------|--------|----------------------|
|                                                |                      |   |                      |
| Raw materials                                       | $          4,004,785 |   | $          3,846,439 |
| Finished goods                                      | 6,333,358            |   | 6,819,286            |
|                                                | 10,338,143           |   | 10,665,725           |
| Reserve for potential          product obsolescence | (2,032,000)          |   | (1,678,000)          |
|                                                |                      |   |                      |
|                                                | 8,306,143            |   | 8,987,725            |
| Non-current portion                                 | 7,496,484            |   | 7,573,225            |
|                                                |                      |   |                      |
| Current portion                                     | $          809,659   |   | $          1,414,500 |
|                                                |                      |   |                      |

Inventories consist primarily  of components and completed units for the Company's AuraGen® product.

Early in its AuraGen®  program, the Company determined it was most cost-effective to outsource production  of components and subassemblies to volume-oriented manufacturers, rather than  produce these parts in house. As a result of this decision, and based on then  anticipated sales, the Company purchased, prior to fiscal 2001, a substantial  inventory of components at volume prices, most of which was then assembled into  finished AuraGen® units. Since sales did not meet such expectations,  the Company has been selling product from this inventory for several years.  Management has analyzed its inventories based on its current business plan,  current orders for future delivery, and pending proposals with prospective customers  and has determined that the Company does not expect to realize all of its inventories  within the next year. The net inventories as of February 29, 2004 and February  28, 2003 which are not expected to be realized within a 12-month period have  been reclassified as long term. 

The Company has also assessed  the net realizability of these assets, and the potential obsolescence of inventory.  In accordance with this assessment, management has recorded a reserve of $2,032,000  and $1,678,000 at February 29, 2004 and February 28, 2003, respectively.  

### NOTE 6 - NOTES RECEIVABLE

In March 2000, the Company  sold its ceramics facility to the former president of the Aura Ceramic, Inc.  division for cash and a note receivable in the amount of $2,500,000 (the "Ceramic  Note"). The note receivable required a $100,000 down payment, bears interest  at 8% per annum, requires a monthly payment of $30,332, and matures on October  1, 2007.

On December 1, 2002, the  Company entered into the Agreement (see Note 4) with a group of individuals.  As part of the closing under the agreement, the Company granted the Purchasers  a security interest in the Ceramic Note and assigned its monthly payments to  the Purchasers in lieu of rent expense. In June 2003, the Company assigned its  interest in the Alpha Ceramic Note to the Purchasers under a forbearance agreement  (see Note 4).  

Neither the Purchasers  nor Aura have received any payments under the Ceramic Note since November 2003  and the remaining $2,042,340 principal balance of the Ceramics Note has been  reserved as uncollectible as of February 29, 2004 and is included in bad debt  expense in Selling, General and Administrative expenses in the accompanying  financial statements.

### NOTE 7 - PROPERTY, PLANT,  AND EQUIPMENT

Property, plant, and equipment  at February 29, 2004 and February 28, 2003 consisted of the following:

|                                                         | 2004                 |   | 2003                 |
|---------------------------------------------------------|----------------------|--------|----------------------|
|                                                    |                      |   |                      |
| Land                                                    | $          3,187,997 |   | $          3,187,997 |
| Buildings                                               | 6,408,796            |   | 6,408,796            |
| Machinery and equipment                                 | 1,823,285            |   | 1,798,600            |
| Furniture and fixtures                                  | 2,308,023            |   | 2,308,023            |
| Leasehold improvements                                  | 135,935              |   | 135,935              |
|                                                    |                      |   |                      |
|                                                    | 13,864,036           |   | 13,839,351           |
| Less accumulated          depreciation and amortization | 6,924,607            |   | 6,495,840            |
|                                                    |                      |   |                      |
| Property, plant          and equipment, net             | $          6,939,429 |   | $          7,343,511 |
|                                                    |                      |   |                      |

Depreciation and amortization  expense was $641,246, $658,523 and $5,868,089 for the years ended February 29,  2004, February 28, 2003 and 2002, respectively.

In the fourth quarter of  fiscal 2002, the Company determined that the tooling fixed assets were impaired  based upon the requirements set forth in SFAS No. 144. Due to the Company's  inventory surplus (see Note 5), and concerns regarding the usefulness of the  tooling assets, future utilization of these assets was determined to be sufficiently  uncertain to warrant their total impairment. This amount is included in impairment  of long-lived assets on the accompanying consolidated statement of operations.

In the second quarter of  fiscal 2003, the Company's Board of Directors approved a plan to sell the land  and buildings which are currently used as Aura's headquarters and operating  location. The Company's analysis of market conditions for the sale of such real  estate indicated the current market value of this real estate was less than  its recorded net book value. As a result, the Company recorded an asset impairment  charge of $2,300,000, in accordance with SFAS No. 144, as part of the loss from  operations.

### NOTE 8 - LONG-TERM INVESTMENTS

Long-term investments and  their related loss reserves at February 29, 2004 and February 28, 2003 consisted  of the following:

|                               | 2004                    |
|------------------------------------|-------------------------|
|                               |                         |
|                               | Net          Book Value |   | Reserve |   | Book          Value |
|                               |                         |   |  |   |  |
| Aquajet Corporation          (a)   | $          -            |   | $          (923,835) |   | $          923,835 |
| Algo Technology,          Inc. (b) | -                       |   | (1,348,652) |   | 1,348,652 |
| Telemac (c)                        | 286,061                 |   | (429,092) |   | 715,153 |
|                               |                         |   |  |   |  |
| Total                              | $          286,061      |   | $(2,701,579) |   | $          2,987,640 |
|                               |                         |   |  |   |  |

|                               | 2003                    |
|------------------------------------|-------------------------|
|                               |                         |
|                               | Net          Book Value |   | Reserve |   | Book          Value |
|                               |                         |   |  |   |  |
| Aquajet Corporation          (a)   | $          -            |   | $          (923,835) |   | $          923,835 |
| Algo Technology,          Inc. (b) | 500,000                 |   | (848,652) |   | 1,348,652 |
| Telemac (c)                        | 500,000                 |   | (750,000) |   | 1,250,000 |
|                               |                         |   |  |   |  |
| Total                              | $          1,000,000    |   | $(2,522,487) |   | $          3,522,487 |
|                               |                         |   |  |   |  |

The above investments consist  solely of common stock and constitute approximately 4.2% of the outstanding  shares of Aquajet Corporation, 2.9% of the outstanding shares of Algo Technology,  Inc., and less than 1% of the outstanding shares of Telemac.

  (a)     The Company maintains  an investment in Aquajet Corporation, a development stage company developing  a water recreation vehicle. In fiscal 2002, the Company recorded a total impairment  of this investment because, on reviewing Aquajet's lack of progress, management  determined it was unlikely to realize any value on this investment.

  (b)   During the year ended February 28, 2003, Aura recognized a $700,000  impairment charge in its investment in Algo Technologies as management concluded  that Algo's financial condition made it unlikely that the Company could sell  the investment without a substantial discount from its carrying value. During  the year ended February 29, 2004, after Algo moved out of the space it was utilizing  in Aura's headquarters facility, the Company recorded an additional $500,000  impairment, which resulted in a total impairment of this investment because  management determined it was unlikely to realize any value on this investment.

  (c)     During fiscal  1999, the Company sold a portion of its shares in Telemac Cellular Corp. ("Telemac")  back to Telemac. The Company then entered into a cancellation of shares agreement,  whereby it tendered the remaining shares to Telemac in exchange for a $2,500,000  note receivable from Telemac. The final payment on the note of $1,250,000, plus  interest accrued at 8% per annum, was due in February 2002. Per the terms of  the agreement, Telemac elected to pay Aura in Telemac common shares at an exchange  price of $5 per share rather than in cash. Aura received 313,232 common shares  in exchange for the final payment. During the year ended February 28, 2002,  the Company recorded an impairment on this investment of $750,000 as it expected  an other-than-temporary decrease in the value to an estimated $500,000, or $1.60  per share. In fiscal 2004, the Company sold a 133,712 of its shares of Telemac  common stock for $415,000, or $3.10 per share, which resulted in a gain of $201,601.  The remaining shares of Telemac stock have been specifically pledged as security  for the Secured Notes (see Note 9).

### NOTE 9 - NOTES PAYABLE  AND CONVERTIBLE NOTES PAYABLE

Notes payable and convertible  notes payable at February 29, 2004 and February 28, 2003 consisted of the following:

|                                      | 2004                 |   | 2003         |
|-------------------------------------------|----------------------|--------|--------------|
|                                      |                      |   |              |
| Convertible notes          payable (a)    | $          5,775,973 |   | $          - |
| Convertible notes          payable (b)    | -                    |   | 2,012,320    |
| Convertible notes          payable (c)    | 625,000              |   | 1,750,000    |
| Notes payable -          buildings (d)    | 4,952,531            |   | 5,058,774    |
| Note payable -          related party (e) | 1,000,000            |   | 1,000,000    |
| Litigation payable          (f)           | 2,201,604            |   | 2,201,604    |
| Trade debt (g)                            | 983,345              |   | 1,308,533    |
| Notes payable -          equipment (h)    | 7,376                |   | 14,147       |
|                                      |                      |   |              |
|                                           | 15,545,829           |   | 13,345,378   |
| Less current portion                      | 10,674,024           |   | 13,305,103   |
|                                      |                      |   |              |
| Long-term portion                         | $          4,871,805 |   | $ 40,275     |
|                                      |                      |   |              |

  (a)     Represents secured  notes payable (the "Secured Notes") on June 15, 2004, bearing interest at 10%  per annum and convertible at the option of the holder into new debt or equity  securities at of the Company at a 20% discount to the best terms by which such  new debt or equity is sold to any new investor. The Secured Notes may be prepaid  on notice at a 15% premium. Repayment of the Secured Notes is secured by substantially  all the assets of the Company (with limited exceptions).  The beneficial conversion  feature of these notes was valued at $348,555 and has been recorded as interest  expense in the accompanying financial statements.  As of July 30, 2004, the  holders of the Secured Notes have not presented a demand for payment that are  currently due and payable.

In connection with the  foregoing financing, primarily as inducements to the lender to continue to provide  interim funding, the Company agreed to issue warrants to purchase an aggregate  of 3,200,000 shares of common stock at a price per share of $0.11, exercisable  through January 7, 2011, and additional warrants (with a net exercise feature)  to purchase an aggregate of 10,209,878 shares of common stock at a price per  share of $0.024.  These warrants were valued at $195,200 and have been recorded  as interest expense in the accompanying financial statements.

Repayment of the Secured  Notes is secured by substantially all the assets of the Company (with limited  exceptions). Pursuant to the 2004 Recapitalization Transactions, the maturity  of such notes is expected to be extended to June 30, 2005, the conversion discount  / prepayment premium is to be eliminated, and a portion of such notes are to  be converted into Series B Preferred Stock (see Note 18. There can be no assurance  that the proposed 2004 Recapitalization Transactions will be completed or that  all of the Secured Notes will be extended and converted as contemplated by these  transactions.

  (b)    The convertible notes  payable (the "5% Convertible Notes") were entered into with investors. The notes  payable bear interest at 5% per annum, mature at various dates, and are convertible  into shares of the Company's convertible, redeemable preferred stock at a rate  of $1 for each $2.20 of convertible, redeemable preferred shares. The Company  evaluated the notes for beneficial conversion features below the market price  of the Company's common shares and recorded $1,168,218 of interest expense in  fiscal 2003. On March 31, 2003, these notes were converted into shares of Series  A Preferred (see Note 12).

  (c)     Convertible notes  payable carry an 8% interest rate and are convertible into common stock at various  conversion rates (the "8% Convertible Notes"). In fiscal 2004, $1,125,000 these  notes were adjusted to be convertible into shares of convertible, redeemable  preferred stock, and such conversion was completed (see Note 12). The Company  recorded interest expense of $316,619 related to the original conversion feature  on the debt in fiscal 2003. 

  (d)    Notes payable - buildings  consists of a First Trust Deed on two buildings in California used as the Company's  headquarters bearing interest at 7.625% per annum. A final balloon payment is  due in fiscal 2009. In April 2003, the Company defaulted on these notes payable  and, in June 2004, cured such defaults.  As such, at February 28, 2003, these  notes payable were classified as current liabilities.  

  (e)     Note payable -  related party consisted of a $1,000,000 note payable, which was entered into  in connection with the sale of a minority interest in Aura Realty (see Note  4). The note payable bears interest at 12.3% per annum and is secured by a security  interest in the Ceramic Note (see Note 6). The Company was required to make  interest-only payments for the first 17 months of the term, and the entire $1,000,000  principal was due on May 31, 2004.  Aura was unable to make the principal payment  as demanded by the Purchasers and the note is now in default.

  (f)      The litigation  payable represents the legal settlements entered into by Aura with various parties.  These settlements call for payment terms with 8% interest rate to the plaintiffs  through fiscal 2004.  The Company is in default with respect to payments required  under these settlements.

  (g)     Restructured trade  debt with payment terms over a three-year period with interest at 8% per annum  commencing in January 2000.  The Company is in default with respect to payments  required under these restructuring agreements.

During the fiscal 2003,  the Company settled $1,456,213 of this trade debt, including accrued interest  of $198,000, for $385,142. The total gain on the extinguishment of debt of $1,050,995  is reflected as an extraordinary item in the accompanying consolidated financial  statements and resulted in extraordinary income per share of less than $0.01.  In addition, as part of the transaction, the Company entered into a convertible  note payable agreement with a group of investors for $307,862. This note was  converted into Series A convertible preferred stock in fiscal 2004 (see Note  12).

  (h)     Notes payable  - equipment consists of a note maturing in February 2005 with an interest rate  of 8.45%.

Future maturities of notes  payable at February 29, 2004 were as follows:

| Year Ending February, |        |
|-----------------------|-------------|
| 2005                  | $10,674,024 |
| 2006                  | 123,856     |
| 2007                  | 133,778     |
| 2008                  | 177,395     |
| 2009                  | 4,436,776   |
| Thereafter            | -           |
|                  |             |
| Total                 | $15,545,829 |
|                  |             |

### NOTE 10 - ACCRUED EXPENSES

Accrued expenses at February  29, 2004 and February 28, 2003 consisted of the following:

|                                        | 2004               |   | 2003               |
|---------------------------------------------|--------------------|--------|--------------------|
|                                        |                    |   |                    |
| Accrued payroll and        related expenses | $        421,158   |   | $        431,579   |
| Accrued interest                            | 726,212            |   | 422,339            |
| Accrued severance                           | 250,750            |   | 554,288            |
| Other                                       | 834,109            |   | 364,730            |
|                                        |                    |   |                    |
| Total                                       | $        2,232,229 |   | $        1,772,936 |
|                                        |                    |   |                    |

### Separation Agreements

In December 2001, the Company  and six former members of the Company's senior management ("former employees")  entered into certain separation agreements, effective February 28, 2002. The  former employees received warrants and options exercisable at $0.55 per share  for an aggregate of 22,218,750 shares of the Company's common stock. Under the  provisions of SFAS No. 123, the warrants and options have been recorded in the  financial statements at their intrinsic value and the pro forma impact on the  Company's net loss of recording the warrants and options at fair value is set  forth in Note 12.

Each of the former employees  agreed to be available to the Company for a period of one year and was entitled  to payments aggregating 85% of their former salaries. Because management considered  such payment more in the nature of severance than consulting fees, the Company  recognized $1,080,525 of compensation expense as of February 28, 2002, (approximately  75% of the value of the contracts) and recognized the remaining amount in the  first quarter of fiscal 2003. 

The Company defaulted on  its payment obligations under these separation agreements during fiscal 2003.  During fiscal 2004, these former employees brought a suit against the Company  to collect these defaulted payments and other damages (see Note 11).  

### Adjustment to Accounts  Payable

During the years ended  February 28, 2003 and 2002, the Company adjusted certain of its accrual and  accounts payable accounts. These adjustments reflect primarily reductions in  amounts previously estimated and limited contractual adjustments to amounts  payable under certain trade payable agreements. These amounts have been recorded  as an adjustment to operating expenses as they generally represent changes in  estimates recorded by the Company in previous periods. 

### NOTE 11 - COMMITMENTS  AND CONTINGENCIES

### Leases

At February 29, 2004, the  Company did not have any significant long-term operating leases. Rent expense  charged to operations amounted to $412,531, $956,951 and $868,236 for the years  ended February 29, 2004, February 28, 2003 and 2002, respectively.

### Litigation

Due to the Company's acute  liquidity challenges, it has defaulted in payments under many of its financial  obligations. These defaults effectively render these obligations payable on  demand and the entire principal balance of each obligation has been included  in current liabilities in the accompanying Condensed Consolidated Financial  Statements. The Company is engaged in numerous legal actions by creditors seeking  payment of sums owed. Actions by the parties to these obligations to enforce  their rights to collect the amounts due could require the Company to cease operations.

During fiscal 2004, a group  of former officers of the Company (the "Former Officers"), who resigned  on February 28, 2002 following the commencement of an SEC investigation into  the Company's accounting practices (as described below), filed a number of lawsuits  against the Company. A description of each suit is set forth below:

- On July 23, 2003, the    Former Officers filed a lawsuit against the Company seeking payment of amounts    owed under a consulting arrangement. The Company had renegotiated the amounts    payable under the consulting arrangement, but defaulted on such payments.    The suit seeks full payment based on their original employment agreements,    which had been revised and replaced prior to their resignations. The accruals    reflected on the Company's financial statements were based on the revised    agreements and, should these former officers be awarded the full amount sought    in this suit, the Company would be required to record additional expense of    approximately $1,100,000. 
- On February 8, 2004,    the Former Officers, along with other plaintiffs, filed a lawsuit alleging,    among other things, breach of contract and fraud. At issue were shares of    the Company's common stock that were to be issued to the Former Officers and    the other plaintiffs as a penalty for the Company's failure to register certain    shares of common stock purchased in calendar 2002 (the "Penalty Shares").    The Company has reflected the obligation to issue the Penalty Shares on its    balance sheet at February 29, 2004.
- On May 22, 2003, Kurtzman,    a member of Former Management, filed a "Petition for Writ of Mandamus"    requesting access to the Company's books and records as a shareholder of the    Company (the "Petition"). The Petition was dismissed on May 20,    2004; 

These Former Officers are  expected to participate in the 2004 Recapitalization Transactions and settlement  of these suits is contemplated within these transactions (see Note 18). There  can be no assurance that the 2004 Recapitalization Transactions will be completed  and that these suits with thereby be resolved.

 In June 2002, the Securities  and Exchange Commission ("SEC") brought a civil action against the  Company, NewCom (a former subsidiary of Aura), and certain former members of  the Company's management team, including Zvi (Harry) Kurtzman (the Company's  former Chief Executive Officer) and Steven Veen (the Company's former Chief  Financial Officer) for violations of the antifraud and books and records provisions  of the securities laws. The complaint relates to the financial statements for  various transactions during fiscal years 1996 through 1999. The SEC brought  a related action against Gerald Papazian (the Company's former President). Without  admitting or denying the allegations in the complaint, the Company as well as  the former officers filed consents agreeing to settle the case. The Company  consented to a permanent injunction against violations of specified sections  of the securities laws, with no penalty imposed based on the Company's financial  condition. Mr. Kurtzman consented to a permanent injunction against violations  of specified sections of the securities laws, a $75,000 civil penalty and a  permanent bar from serving as an officer or director of a publicly-traded company.  Mr. Veen consented to a permanent injunction against violations of specified  sections of the securities laws, a $50,000 civil penalty and a five-year suspension  from appearing or practicing before the SEC. Mr. Papazian consented to a permanent  injunction against violations of specified sections of the securities laws and  a $25,000 civil penalty. In September 2002, a federal grand jury indicted three  officers of NewCom, including Mr. Veen, on various conspiracy and fraud charges  related to NewCom's financial statements. This matter was brought to trial in  2003 and Mr. Veen was acquitted of all charges.

In January 1999, the Company  settled shareholder litigation in the Barovich/Chiau matter. On November 20,  1999, the parties entered into an Amended Stipulation of Settlement, which required  the Company to pay $2,260,000, plus interest, in monthly installments of $70,350.  On October 22, 2002, after the Company had failed to make certain monthly payments,  the plaintiffs applied for and obtained a judgment against the Company for $935,530,  which represents the balance due with respect to the original principal amount.  The Company has subsequently made two monthly payments, thereby reducing the  amount owed to $794,650, plus interest. Subsequent to February 28, 2003, the  plaintiff took further legal action to enforce the October 2002 judgment, culminating  in a lien on one of the Company's smaller bank accounts. The Company has recorded  this liability in full in the accompanying financial statements.

The Company is involved  in certain legal proceedings and claims which arise in the normal course of  business. Management does not believe that the outcome of these matters will  have a material effect on the Company's financial position or results of operations

### ******Settlements  in Fiscal 2004**

On December 11, 2002, one  of the Company's former vendors filed suit against the Company, alleging the  Company breached the terms of a payment plan for $283,296. The settlement discussions  between the two parties have been largely unsuccessful. During fiscal 2004,  the plaintiff obtained a summary judgment for its damages plus its costs. The  Company negotiated an agreement, subsequently amended, with the plaintiff under  which the Company would pay $250,000 over time in full settlement of this judgment.  As of July 30, 2004, the Company had made all required payments per the amended  agreement. The Company has recorded this liability in full in the accompanying  financial statements.

### Settlements in Fiscal  2003

On December 11, 2001, the  Company filed a complaint in the United States District Court, Central District  of California, against CRS Emergency Vehicles Co., Custom Coaches International,  and C. Ray Smith for Breach of Contract, Conversion, Bad Faith, Fraud, and Injunctive  Relief. The action arose out of a sale to defendant distributors of approximately  $1,200,000 of the Company's AuraGen® product. On May 7, 2002, the Company  entered a settlement of this case whereby the defendants agreed to release or  otherwise account for all of the product shipped to the Company and terminate  their distributorship agreement. The Company accounted for this event in the  fourth quarter of fiscal 2002 and reversed revenue of $1,200,000 due to the  return of the inventory.

In 1991, one of the Company's  former shareholders filed a civil action against the Company, its founding management  members, who are no longer employees of the Company, and two of the Company's  former shareholders. Following an appeal, the Company paid its portion of the  judgment in full to the defendant. In December 2002, the defendant received  a court order, requiring the Company to be liable for the damages awarded against  the former shareholders. In February 2003, the Company paid $212,444 to the  defendant, which represented the final settlement in this matter.

### Settlements in Fiscal  2002

In June 1999, a lawsuit  naming Aura was filed by Deutsche Financial Services ("DFS") regarding  the termination of DFS' credit facility. The Company entered into a definitive  Settlement and Mutual Release Agreement effective March 12, 2001, providing  for the settlement of litigation. Under the terms of the settlement, DFS received  cash payments totaling $350,000 and 10,000,000 shares of Aura's common stock  in exchange for mutual releases. The Company had previously recorded an estimated  liability of $5,500,000, which was carried in notes payable on the accompanying  consolidated financial statements. The aggregate value of the settlement was  $4,350,000 based on the Company's common stock price at the settlement date,  resulting in an adjustment in fiscal 2002 to the original accrual of $1,150,000.

On November 12, 1999, a  lawsuit (Excalibur) was filed by three investors against Aura and others, arising  out of two NewCom financings consummated in December 1998. As part of the settlement,  Aura received $2,000,000. The plaintiffs received re-pricing shares sought as  part of their underlying contract claims. The re-pricing shares have been recorded  in fiscal 2002 as an adjustment to the original issuances, and the $2,000,000  has been recorded as an adjustment to legal settlements.

In December 1999, a lawsuit  was filed against NewCom, which, as amended, also included Aura and others.  The plaintiff's sixth amended complaint purported to be a class action on behalf  of a class alleged to consist of approximately 200,000 people who purchased  a NewCom, aka Atlas Peripherals, computer product from various retail stores.  In August 2001, the Company entered into a settlement Memorandum of Understanding,  which limited the total Aura portion of the litigation to $400,000, payable  in monthly installments of $10,000 to the plaintiffs. The parties have since  entered into a definitive Settlement Agreement incorporating the terms of the  Memorandum, which received final approval of the trial court in December 2001.

### NOTE 12 - STOCKHOLDERS'  EQUITY

### Series A Convertible,  Redeemable Preferred Stock

The Board of Directors  is authorized to issue from time to time up to 10,000,000 shares of preferred  stock, in one or more series, and the Board of Directors is authorized to fix  the dividend rates, any conversion rights or rights of exchange, any voting  right, any rights and terms of redemption (including sinking fund provisions),  the redemption price, liquidation preferences and any other rights, preferences,  privileges and restrictions of any series of preferred stock.

On March 25, 2003, the  Board of Directors of the Company authorized 1,500,000 shares of Series A convertible,  redeemable preferred stock (the "Series A") with a par value of $0.005.  Each Series A share is convertible into common stock at $0.08 per share. The  Series A can be converted at the option of the holder provided that the Company  does not exercise the mandatory conversion on any date on or after March 31,  2004. The Company may exercise its right to mandatory conversion provided that  the current market value of the Company's common stock equal or exceeds 120%  of the then prevailing conversion price.

The Series A has liquidation  preference of $10 per share. In addition, the holders of the Series A are entitled  to receive cumulative dividends at a rate of 5% per annum. Dividends are payable  in arrears on the first day of each quarter, commencing on September 1, 2003.  The shares can be redeemed on or after March 31, 2004 in whole or in part at  a redemption price equal to $10 per share, plus the amount of any accumulated  and unpaid dividends. 

During the year ended February  29, 2004, the Company issued 591,110 shares of Series A:

-   57,090 of these shares    were issued for cash totaling $259,500 in private offerings to various third    parties at an average price of $4.55 per share of Series A or an effective    average price per common share of $0.036 on an "if converted" basis;
-  522,238 of these shares    were issued in conversion of $2,499,509 of principal and accrued interest    of the 5% Convertible Notes (see Note 9) to various third parties at an average    price of $4.79 per share of Series A or an effective average price per common    share of $0.038 on an "if converted" basis; and
-  11,782 of these shares    were issued in conversion of $1,178,167 of principal and accrued interest    of the 8% Convertible Notes (see Note 9) to various third parties at an average    price of $10.00 per share of Series A or an effective average price per common    share of $0.08 on an "if converted" basis.

### Common Stock

At February 29, 2004 and  February 28, 2003, the Company had 500,000,000 shares of $0.005 par value common  stock authorized for issuance.

As described below, as  of February 29, 2004 and February 28, 2003, the Company has commitments to issue,  in exchange for consideration already received, approximately 22 million shares  of common stock. This is in addition to outstanding stock options, warrants  and convertible securities.

During the year ended February  29, 2004, the Company did not issue any shares of common stock.

During the year ended February  28, 2003, the Company issued 41,700,830 shares of common stock for cash totaling  $5,694,001 in private offerings to various third party investors and issued  923,077 shares of common stock totaling $207,692 from committed stock.

During the year ended February  28, 2003, the Purchasers of a minority interest in Aura Realty purchased 21,366,347  shares of the Company's common stock for $1,493,000 at an average price of $0.07  per share. The Company is required to issue up to 8,151,324 additional shares  to the Purchasers as a result of the Company's failure to timely file a registration  statement covering such shares (see Note 4). These shares have been included  in Committed Common Stock at Feburary 29, 2004 in the accompanying financial  statements. As these shares are to be issued in relation to a common stock transaction,  no expense has been recorded.

During the year ended February  28, 2002, the Company issued 35,906,981 shares of common stock in private placements.

### Debt Extinguishments and  Settlements for Common Stock

During the year ended February  28, 2003, the Company issued 659,175 shares of common stock in satisfaction  of $169,740 in liabilities and contractual obligations.

During the year ended February  28, 2002, the Company restructured $16,179,900 of debt and related accrued interest  into 31,398,771 shares of common stock valued at $15,173,905, resulting in a  pre-tax extraordinary gain for the early extinguishment of debt of $1,005,995.  This was originally recorded as a gain on extinguishment of debt of $4,316,645.  However, due to price protection commitments, the former debt holders may be  entitled to receive an additional 14,714,000 common shares resulting in an $3,310,650  adjustment to the gain on extinguishment of debt. The gain, in addition to an  $883,545 gain resulting from a creditor's forgiveness of the remaining balance  of an unsecured note payable plus accrued interest has been reflected as an  extraordinary item in the accompanying consolidated financial statements. The  additional 14,714,000 shares, valued at $3,310,650, were recorded as committed  common stock on the February 28, 2002 balance sheet. During the year ended February  28, 2003, 923.077 shares of committed common stock were issued; none were issued  during the year ended Februrary 29, 2004. As of February 29, 2004 and February  28, 2003, 13,790,924 common shares with a value totaling $3,102,958 are reflected  on the consolidated statement of stockholders' equity as committed common stock.  

During the year ended February  28, 2002, the Company issued 8,500,502 shares of common stock in satisfaction  of $278,801 in operating expenses and $2,734,613 of liabilities, of which $1,416,364  was long-term trade debt included in notes payable and other liabilities; 10,000,000  shares of common stock valued at $4,000,000 as partial settlement with Deutsche  Financial Services; 8,947,631 shares of common stock for re-pricing a prior  year private placement, and 1,743,801 shares of common stock as a finder's fee  for a current year private placement. The finder's fee and re-pricing did not  have any effect on total stockholders' equity.

### Director Stock Options

The Company has granted  nonqualified stock options to certain directors. Options were granted at fair  market value at the date of grant, vested immediately, and were exercisable  at any time within a 10-year period from the date of grant.

 A summary of the Company's  outstanding options and activity under the director's plan is as follows:

|                                                                        | Number          of Shares |   | Weighted-Average          Exercise Price |
|------------------------------------------------------------------------|---------------------------|--------|------------------------------------------|
| Outstanding, February          28, 2002 and 2003 and February 29, 2004 | 450,000                   |   | $          2.06 - 2.30                   |
| Exercisable, February          29, 2004                                | 450,000                   |   | $          2.06 - 2.30                   |

### Employee Stock Options

The 1989 Stock Option Plan  has granted the maximum allowable number of options authorized. In March 2000,  the Company's Board of Directors adopted the 2000 Stock Option Plan, a non-qualified  plan which was subsequently approved by the stockholders. The 2000 Stock Option  Plan authorizes the grant of options to purchase up to 10% of the Company's  outstanding common shares. 

During the year ended February  29, 2004, the Company:

-  issued stock options    to employees to purchase 10,126,302 of the Company's common stock, 1,876,302    of these shares were a reallocation of shares granted to employees in January    2003 that terminated their employment prior to vesting in these options. 
-  issued stock options    to various Board members and consultants to purchase 12,150,000 of the Company's    common stock.

Options issued to employees  and employee directors were issued with an exercise price equal to the fair  market value of the Company's common stock and the value of options, as determined  by the Black-Scholes model, of consultant options was not material.

Activity in the employee  stock option plans was as follows:

|                                  | 1989        Plan        |   | 2000        Plan                       |
|---------------------------------------|-------------------------|--------|----------------------------------------|
|                                  |                         |   |                                        |
|                                  | Number        of Shares |        | Weighted-Average        Exercise Price |  | Number        of Shares |  | Weighted-Average        Exercise Price |
|                                  |                         |   |                                        |   |  |   |  |
| Outstanding, February        28, 2001 | 5,431,000               |   | $ 1.79        - 7.31                   |   | 17,433,000 |   | $ 0.31        - 0.60 |
| Granted                               | -                       |   | $ -                                    |   | 18,849,001 |   | $ 0.45        - 0.64 |
| Canceled                              | (20,000)                |   | $ 3.00                                 |   | (428,250) |   | $ 0.31        - 0.45 |
| Expired                               | (6,000)                 |   | $ 7.25                                 |   | (437,750) |   | $ - |
| Outstanding, February        28, 2002 | 5,405,000               |   | $ 1.79        - 7.31                   |   | 35,844,251 |   | $ 0.31        - 0.64 |
| Granted                               | -                       |   | $ -                                    |   | 17,201,400 |   | $ 0.24 |
| Canceled                              | (4,438,000)             |   | $ 1.79        - 7.31                   |   | (14,409,750) |   | $ 0.32 |
| Outstanding, February        28, 2003 | 967,000                 |   | $ 1.79        - 7.31                   |   | 38,635,901 |   | $ 0.31        - 0.64 |
| Granted                               | -                       |   | $ -                                    |   | 28,676,302 |  | $        0.05 - 0.12 |
| Canceled                              | (253,000)               |   | $ 1.79        - 7.31                   |   | (1,911,799) |  | $        0.08 - 0.64 |
| Outstanding, February        28, 2004 | 714,000                 |   | $ 1.79        - 7.31                   |   | 55,400,404 |  | $        0.05 - 0.64 |
| Exercisable, February        28, 2004 | 714,000                 |   | $ 1.79        - 7.31                   |   | 52,534,727 |  | $        0.05 - 0.64 |

Certain option issuances,  cancellations, and expiration numbers presented in prior years have been corrected.  Amounts related to these corrections are not material to the financial statements.

The weighted-average remaining  contractual life of the employee options outstanding at February 29, 2004 was  7.64 years. The exercise prices for the options outstanding at February 29,  2004 ranged from $0.05 to $7.31, and information relating to these options is  as follows:

| Range of Exercise        Prices |   | Stock Options Outstanding |   | Stock Options Exercisable |   | Weighted-Average        Remaining Contractual Life |   | Weighted-Average        Exercise Price of Options Outstanding |   | Weighted-Average        Exercise Price of Options Exercisable |
|---------------------------------|--------|---------------------------|--------|---------------------------|--------|----------------------------------------------------|--------|---------------------------------------------------------------|--------|---------------------------------------------------------------|
|                                 |        |                           |        |                           |        |                                                    |        |                                                               |        |                                                               |
| $0.05        - 0.35             |        | 33,891,403                |        | 31,075,726                |        | 8.59        years                                  |        | $0.07                                                         |        | $0.08                                                         |
| $0.36        - 3.00             |        | 22,114,001                |        | 22,064,001                |        | 7.81        years                                  |        | $0.57                                                         |        | $0.58                                                         |
| $3.01        - 7.31             |        | 109,000                   |        | 109,000                   |        | 4.05        years                                  |        | $3.47                                                         |        | $3.47                                                         |
|                                 |        |                           |        |                           |        |                                                    |        |                                                               |        |                                                               |
|                                 |        | 56,114,404                |        | 53,248,727                |        |                                                    |        |                                                               |        |                                                               |
|                                 |        |                           |        |                           |        |                                                    |        |                                                               |        |                                                               |

### Warrants

During the year ended February  29, 2004, in connection with the Intercreditor Secured Debt financing (see Note  9), primarily as inducements to the lenders to continue to provide interim funding,  the issued warrants to purchase an aggregate of 3,200,000 shares of common stock  at a price per share of $0.11, exercisable through January 7, 2011. Subsequent  to year-end, the Company issued warrants (with a net exercise feature) to purchase  an aggregate of 10,209,878 shares of common stock at a price per share of $0.024  to the same lenders, again as inducements to continue to provide interim funding.

During the year ended February  28, 2003 and in relation to the Agreement entered into on December 1, 2002 (see  Note 4), the Company issued warrants to purchase 15,000,000 shares of the Company's  common stock as incentive for the Purchasers to enter into the Agreement.

Per the Agreement, the  warrants expire in five years, and the exercise prices are as follows:

-  $0.15 per share during    the first 24 months after closing - $0.20 per share from the 25th month after    closing
-  $0.25 per share from    the 37th month after closing

The Company agreed to file  a registration statement with the SEC within 60 days of closing under the Agreement  and issued 5,500,000 additional warrants to the Purchasers during fiscal 2004  because it failed to do (see Note 4). These warrants were valued at $231,000  , using the Black-Scholes pricing model, which is recorded in the accompanying  fiscal 2004 financial statements as an additional loss on the sale of the minority  interest in Aura Realty.

At February 29, 2004 and  February 28, 2003, there were warrants outstanding to purchase 44,247,312****and 48,956,727 shares, respectively, of the Company's common stock, exercisable  at an average price of $0.44 and $038, respectively, per share. 

As of February 29, 2004,  the aggregate number of outstanding options, warrants, and common share equivalents  was significantly in excess of the authorized but unissued number of shares  of the Company's common stock. Management intends to seek shareholder approval  of an increase in the Company's authorized shares sufficient to satisfy all  existing commitments and create available shares for potential future investments.  However, such approval is not guaranteed.  In the event that management determines  that they are not able to get shareholder approval, the value of the warrants  may be required to be classified as a liability under the provisions of EITF  00-19 - Accounting for Deriviative Financial Instruments Indexed To and Potentially  Settled In a Company's Own Stock.

Activity in issued and  outstanding warrants was as follows:

|                                       | Number        of Shares | Exercise        Prices |
|---------------------------------------|-------------------------|------------------------|
| Outstanding, February        28, 2001 | 22,800,515              | $        0.27 - 2.54   |
| Issued                                | 14,904,812              | $        0.20 - 0.55   |
| Exercised                             | (100,000)               | $        0.27          |
| Expired                               | -                       | $ -                    |
| Outstanding, February        28, 2002 | 37,605,327              | $        0.20 - 2.25   |
| Issued                                | 15,000,000              | $        0.15          |
| Exercised                             | -                       | $        -             |
| Expired                               | -                       | $ -                    |
| Outstanding, February        28, 2003 | 52,605,327              | $        0.15 - 2.54   |
| Issued                                | 11,800,000              | $        0.05 - 0.15   |
| Exercised                             | -                       | $        -             |
| Expired                               | 20,258,015              | $        0.20 - 0.48   |
| Outstanding, February        28, 2004 | 44,247,312              | $        0.05 - 2.54   |

### NOTE 13 - INCOME TAXES

The Company has not incurred  any income tax expense since inception. The actual tax benefit differs from  the expected tax benefit computed by applying the United States federal corporate  tax rate of 34% to loss before income taxes as follows for the years ended February  29, 2004 and February 28, 2003 and 2002:

|                                                | 2004         |   | 2003         |   | 2002         |
|-----------------------------------------------------|--------------|--------|--------------|--------|--------------|
|                                                |              |   |              |   |              |
| Expected tax benefit                                | 34.0%        |   | 34.0%        |   | 34.0%        |
| State income taxes,          net of federal benefit | 6.0          |   | 6.0          |   | 6.0          |
| Changes in valuation          allowance             | (40.0)       |   | (40.0)       |   | (40.0)       |
| Total                                               | -          % |   | -          % |   | -          % |

The following table summarizes  the significant components of the Company's deferred tax asset at February 29,  2004 and February 28, 2003:

|                                              | 2004                 |   | 2003          |
|---------------------------------------------------|----------------------|--------|---------------|
|                                              |                      |   |               |
| Deferred tax asset                                |                 |   |          |
| Property, plant,          and equipment and other | $          6,100,000 |   | $ 4,800,000   |
| Net operating loss          carryforward          | 107,500,000          |   | 104,800,000   |
| Valuation allowance                               | (113,800,000)        |   | (109,600,000) |
| Net deferred tax          asset                   | $          -         |   | $          -  |

The Company recorded an  allowance of 100% for its net operating loss carryforward due to the uncertainty  of its realization.

A provision for income  taxes has not been provided in these financial statements due to the net loss.  At December 31, 2003, the Company had operating loss carryforwards of approximately  $262,000,000, which expire through 2024.

### NOTE 14 - EMPLOYEE BENEFIT  PLANS

The Company sponsored two  employee benefit plans: The Employee Stock Ownership Plan (the "ESOP")  and a 401(k) plan. In addition, the options granted under the 1989 and 2000  Stock Option Plans are valid and subject to exercise.

The ESOP is a qualified  discretionary employee stock ownership plan that covers substantially all employees.  The Company did not make any contributions to the ESOP during the years ended  February 29, 2004, February 28, 2003 and 2002.

The Company sponsors a  voluntary, defined, contribution 401(k) plan. The plan provides for salary reduction  contributions by employees and matching contributions by the Company of 20%  of the first 7% of the employees' pre-tax contributions. The matching contributions  by the Company included in selling, general, and administrative expenses were  $21,253, $44,720 and $58,025 for the years ended February 29, 2004, February  28, 2003 and 2002, respectively.

### NOTE 15 - RELATED  PARTY TRANSACTIONS

In February 2003, the Company  entered into convertible notes payable agreements with a group of investors,  which included five members of the Company's former management. The notes payable  bear interest at 8% per annum, mature at various dates, and are convertible  into shares of the Company's convertible, redeemable preferred stock at a rate  of $1 for each $2.20 of convertible, redeemable preferred shares (see Note 9  and Note 18).

On December 1, 2002, the  Company entered into a Sale and Leaseback Agreement with a group of individuals,  including five individuals who were members of the Company's former management,  who separated from the Company at the end of February 2002, pursuant to which  the Company agreed to sell Aura Realty to the Purchasers and enter into a 10-year  lease of the properties owned by Aura Realty (see Note 4).

During the year ended February  28, 2002, the Company entered into a short-term loan agreement with a member  of the Board of Directors for $250,000, bearing interest at 10% per annum. The  note payable, including accrued interest of $2,500, was repaid in the first  quarter of fiscal 2003.

In December 2001, following  deliberations by the Compensation Committee and the Board of Directors in consultation  with independent consultants and after concluding discussions with the affected  members of the management, team the Company entered into separation agreements  with Messrs. Kurtzman, Papazian, Schwartz, Kaufman, and Veen and Ms. Kurtzman  Lavut, terminating their existing employment contracts and restructuring their  severance benefits. Pursuant to these separation agreements, these individuals  terminated their employment relationship with the Company effective February  28, 2002.

Under the terms of the  separation agreements, the departing officers relinquished their rights to any  multi-year, cash, severance benefits in exchange for a one time grant of stock  options and warrants, exercisable at $0.55 per share, which vest over a period  of 18 months from the termination of employment and salary continuation (in  the form of consulting agreements) at 85% of former salaries for a period of  one year. The aggregate number of shares underlying the options and warrants  issued under these separation agreements is 22,218,750.   In addition, each  executive is entitled to receive continued medical benefits for three years  following termination of employment.

### NOTE 16 - SEGMENT INFORMATION

The Company is a United  States based company providing advanced technology products to various industries.  The principal markets for the Company's products are North America, Europe,  and Asia. All of the Company's operating long-lived assets are located in the  United States. The Company operates in one segment.

Total net revenues from  customer geographical segments are as follows for the years ended February 29,  2004 and February 28, 2003 and 2002:

|               | 2004                 |   | 2003                 |   | 2002                 |
|---------------|----------------------|--------|----------------------|--------|----------------------|
|          |                      |   |                      |   |                      |
| United States | $          1,841,000 |   | $          997,000   |   | $          2,792,000 |
| Canada        | 1,000                |   | 27,000               |   | 39,000               |
| Europe        | 3,000                |   | 21,000               |   | 218,000              |
| Asia          | 19,000               |   | 59,000               |   | 67,000               |
|          |                      |   |                      |   |                      |
| Total         | $          1,864,000 |   | $          1,104,000 |   | $          3,116,000 |
|          |                      |   |                      |   |                      |

 

### NOTE 17 - QUARTERLY FINANCIAL  INFORMATION (UNAUDITED)

The following tables list  the Company's quarterly financial information for the years ended February 29,  2004, February 28, 2003 and 2002:

| 2004 |
|------|
|      |

|                                    | First                Quarter |   | Second        Quarter |   | Third                Quarter |   | Fourth        Quarter |   | Total                Year |
|-----------------------------------------|------------------------------|--------|-----------------------|--------|------------------------------|--------|-----------------------|--------|---------------------------|
|                                    |                              |   |                       |   |                              |   |                       |   |                           |
| Net revenues                            | $        97,612              |   | $        519,679      |   | $        726,692             |   | $        520,342      |   | $1,864,325                |
| Gross profit                            | 30,829                       |   | 230,730               |   | 424,229                      |   | 276,574               |   | 378,588                   |
| Loss from operations                    | (1,643,011)                  |   | (3,271,243)           |   | (1,429,628)                  |   | (4,605,143)           |   | (10,948,796)              |
| Net loss                                | (2,225,284)                  |   | (3,536,450)           |   | (1,886,177)                  |   | (5,936,964)           |   | (13,584,875)              |
| Basic and diluted        loss per share | $        (0.005)             |   | $        (0.008)      |   | $        (0.005)             |   | $        (0.014)      |   | $        (0.032)          |

| 2003 |
|------|

|  |
|--|

|                                    | First                Quarter |   | Second        Quarter |   | Third                Quarter |   | Fourth        Quarter |   | Total                Year |
|-----------------------------------------|------------------------------|--------|-----------------------|--------|------------------------------|--------|-----------------------|--------|---------------------------|
|                                    |                              |   |                       |   |                              |   |                       |   |                           |
| Net revenues                            | $        183,739             |   | $        272,978      |   | $        423,066             |   | $        223,987      |   | $        1,103,770        |
| Gross profit                            | $        102,753             |   | $        127,858      |   | $        223,912             |   | $        78,148       |   | $        532,671          |
| Loss from operations                    | $        (3,290,539)         |   | $        (5,219,668)  |   | $        (2,238,263)         |   | $        (2,825,208)  |   | $        (13,573,678)     |
| Net loss                                | $        (3,958,201)         |   | $        (5,694,039)  |   | $        (2,334,550)         |   | $        (4,154,083)  |   | $        (16,140,873)     |
| Basic and diluted        loss per share | $        (0.01)              |   | $        (0.01)       |   | $        -                   |   | $        (0.01)       |   | $        (0.04)           |

| 2003 |
|------|
|      |

|                                    | First                Quarter |   | Second        Quarter |   | Third                Quarter |   | Fourth        Quarter |   | Total                Year |
|-----------------------------------------|------------------------------|--------|-----------------------|--------|------------------------------|--------|-----------------------|--------|---------------------------|
|                                    |                              |   |                       |   |                              |   |                       |   |                           |
| Net revenues                            | $        2,874,569           |   | $        863,773      |   | $        306,126             |   | $        (928,173)    |   | $        3,116,295        |
| Gross profit (loss)                     | $        1,433,946           |   | $        550,099      |   | $        137,252             |   | $        (1,996,609)  |   | $        124,688          |
| Loss from operations                    | $        (3,393,606)         |   | $        (5,248,819)  |   | $        (3,871,227)         |   | $        (11,933,279) |   | $        (24,446,931)     |
| Net loss                                | $        (2,105,698)         |   | $        (6,034,811)  |   | $        (1,094,577)         |   | $        (15,701,809) |   | $        (24,936,895)     |
| Basic and diluted        loss per share | $        (0.01)              |   | $        (0.02)       |   | $        -                   |   | $        (0.05)       |   | $        (0.08)           |

###   

### NOTE 18 - SUBSEQUENT EVENTS

Subsequent  to year end through July 30, 2004, the Company received interim funding to meet  its immediate cash needs as follows:

-   $1,410,000 from Koyah    Leverage Partners, LLP and other investors in the Secured Notes. These amounts    were added to the Secured Notes (see Note 9). 
-  $300,000 from individuals    affiliated with the Aries Group Ltd. as an advance against their purchase    of Series B Preferred Stock contemplated in the 2004 Recapitalization Transactions    (see below).
-   $400,000 from the    purchasers under the contemplated sale and lease back of the Company's headquarters    facilities as an advance against such purchase. These funds were used to cure    the defaults on the mortgage note related to the real estate (see Note 9).

In  April 2004, the Company issued warrants (with a net exercise feature) to purchase  an aggregate of 10,209,878 shares of common stock at a price per share of $0.024  to Koyah Leverage Partners, LLP and other investors in the Secured Notes, primarily  as inducements to continue to provide interim funding.

In  June 2004, the Company cured all remaining payment defaults, including late  fees and penalty interest charges, related to the mortgage note payable secured  by the Company's headquarters facility. A portion of the funds required to make  this cure payment were provided as an advance against the contemplated purchase  of the real estate included in the 2004 Recapitalization Transactions as described  more fully below. At July 30, 2004, this note was no longer in default.

## The 2004 Recapitalization  Transactions

In May and June 2004, the  Company reached nonbinding agreements in principle with a number of parties  that, if consummated, would resolve the Company's monetary defaults on its headquarters  mortgage, settle certain litigation involving the Company and former management,  provide for additional equity at closing, provide for conversion to equity of  existing secured debt and provide for changes in the Company's senior management  and Board of Directors (together, the "2004 Recapitalization Transactions").  Management believes that following completion of the 2004 Recapitalization Transactions,  including receipt of funding, the Company will have a more stable financial  condition. Completion of the 2004 Recapitalization Transactions would substantially  dilute the interests of existing stockholders, reducing by at least one-half  their proportional interest in the Company. Although nonbinding term sheets  have been executed with the parties for each of these transactions, no assurances  can be given that the transactions will close in the immediate future or at  all. In the event the agreements are not consummated, it is likely that the  Company would need to file for bankruptcy protection. Even if the 2004 Recapitalization  Transactions are completed as anticipated, the Company will continue to require  forbearance of several creditors and may require additional financing in the  next twelve months as it seeks to increase its sales. As a result of the 2004  Recapitalization Transactions, the Company will record an as yet undetermined  charge to earnings due to the settlement of certain litigation at amounts in  excess of those currently reserved on the Company's balance sheet, and the expected  loss on the sale of the headquarters facility.

The 2004 Recapitalization  Transactions include four related components: the sale of the Company's headquarters  facility; the settlement of outstanding litigation with the Aries Group (see  Note 19), conversion of Intercreditor Secured Debt into equity and the receipt  of new equity funding. Each component involves in the issuance of shares of  a new series of preferred stock, Series B Cumulative Convertible Preferred Stock  (the "Series B Preferred Stock").

*Issuance  and Terms of Series B Preferred Stock.* Each of the components of the 2004  Recapitalization Transactions involves issuance of Series B Preferred Stock.  To consummate the 2004 Recapitalization Transactions, the Company's Board of  Directors intends to designate five (5) million shares of the Company's authorized  preferred stock as Series B Cumulative Convertible Preferred Stock. The new  Series B Preferred Stock will rank senior to the Company's common stock and  Series A Convertible, Redeemable Preferred Stock (the "Series A Preferred Stock"),  accrues dividends at an annual rate of 8% and is convertible into shares of  the Company's common stock at $0.02 per common share. The conversion price  is subject to adjustment to the lowest price at which the Company in the future  sells shares of common stock, with limited exceptions. The Company has the  right to force conversion of the Series B Preferred Stock into common stock  upon the satisfaction of a number of conditions, including the Company's common  stock trading at a price in excess of $0.10 for twenty consecutive trading days.  The Series B Preferred Stock has class voting rights to elect four directors  of the Company and to approve certain corporate transactions, including the  issuance of any shares of preferred stock on parity with or senior to the Series  B Preferred Stock. As discussed below, certain shares of Series B Preferred  Stock may be sold at a substantial discount to their liquidation preference.

The Series  B Preferred Stock cannot be converted into common shares unless and until the  Company's shareholders approve an increase in the number of authorized common  shares. As part of the 2004 Recapitalization Transactions, the Company is committing  to seek such shareholder approval as soon as possible. 

In addition,  the Company has a tentative arrangement to convert all accrued Series A Preferred  dividends into Series B Preferred stock. This will result in issuance of 75,655  shares of Series B Preferred.

*The Sale of the Headquarters  Facility.* In May 2004, the Company, Aura Realty and the minority shareholders  in Aura Realty (the "Realty Minority Shareholders") agreed, subject to certain  conditions, to a sale of the Company's headquarters facility to a buyer (the  "Real Estate Buyer") controlled by Yair Ben-Moshe and David Maimon (the "May  2004 Agreements"). On June 11, 2004, the Realty Minority Shareholders sent  notice to the Company that it had defaulted on the agreement as that pertained  to the settlement with the Realty Minority Shareholders and terminated the agreement.  The Company has continued negotiations with the Realty Minority Shareholders  since that date but has not yet been successful in getting them to recommit  to the May 2004 Agreements or any other settlement. Such an agreement with  the Realty Minority Shareholders is a condition precedent to the Real Estate  Buyer's obligation to complete the purchase. 

Through July 30, 2004,  Messrs. Ben-Moshe and Maimon have advanced the Company $0.4 million , which  has been used, combined with other funds provided by the Company, to cure all  existing defaults with the mortgagor and bring the note current. Such payment  will be applied to the purchase price and, in the event closing of such sale  does not occur, will be deemed to be an unsecured loan to the Company bearing  interest at 10% per annum and payable in 24 equal monthly payments, and convertible,  at the option of the holder, into Series B Preferred Stock. 

As contemplated, the sales  price of the property is $7.8 million, of which approximately $5.0 million would  be used to repay the existing mortgage, $1.6 million would be paid to the Realty  Minority Shareholders,$0.8 million would be credited to the Real Estate Buyer  for deposits required under the lease back (discussed below) and building repairs  and the remaining approximately $0.4 million has already been advanced to the  Company as of July 30, 2004. In addition to the subject real estate, the Real  Estate Buyer would also receive 220,000 units of the Series B Placement (as  described below) and four-year warrants to purchase 15,000,000 shares of the  Company's commons stock at an exercise price of $0.075. At closing of the sale,  Aura would lease back a portion of the premises (the warehouse and the first  floor of the office building) for a period of 4 years at a monthly rent of $56,000,  triple net. Aura will provide a security deposit of approximately $0.67 million,  to be applied to the fourth year's rent. Also at closing, (i) the Realty Minority  Shareholders would cancel the existing $1.0 million note issued by Aura on December  1, 2002, and receive from Aura a new note in the amount of $0.25 million, bearing  interest at 12.3% and payable over 24 months, (ii) the Alpha Ceramics note with  a balance due of approximately $2.0 million as of July 30, 2004, which had been  assigned to the Realty Minority Shareholders, would be reassigned to the Real  Estate Buyer (this note is currently nonperforming; no payments have been received  since November 2003), (iii) and the Realty Minority Shareholders would receive  shares of Series B Preferred Stock with a liquidation preference of $0.15 million.  Aura is obligated to pay the Realty Minority Shareholders $40,582 per month  for continued use of the facility pending closing of the sale; such amount is  in addition to continued payments due under the mortgage. As of July 30, 2004,  the Company was in default of making such payment to the Realty Minority Shareholders  for the month of July. Upon closing of the transactions described above, the  Realty Minority Shareholders would release any further claims they have related  to Aura Realty and the December 1, 2002 Sale/Leaseback Agreement.

*The Series B Placement.*The  Company is seeking to raise a minimum of $5 million and a maximum of $15 million  in a private placement of units consisting of shares of Series B Preferred Stock  and warrants to purchase common stock. The Company has received preliminary  indications of interest from subscribers proposing to invest an aggregate of  approximately $6.9 million (exclusive of payments on real estate transaction  and conversion of Intercreditor Secured Debt).

Certain funds have already  advanced to the Company to be applied to the placement; as of July 30, 2004,  approximately $0.6 million has been received. The Company has used and would  be unable to return such funds in the event the offering does not close; in  which case, such funds evidence short-term indebtedness of the Company. The  Company proposes to sell the units at the liquidation preference of the shares  of Series B Preferred Stock, with each unit to include warrants to purchase  common stock in an amount equal to the 25% of the number of shares of common  stock obtainable upon conversion of the associated Series B Preferred Stock,  at a price per share of $0.02, exercisable for seven years. Thus, for an investment  of $100,000, an investor receives shares of Series B Preferred Stock with a  liquidation preference of $100,000, convertible into 5,000,000 shares of common  stock, and warrants to purchase an additional 1,250,000 shares of common stock.  It is anticipated that purchasers of the units may pay all or a portion of the  purchase price in the form of unsecured personal promissory notes bearing interest  at 8% and payable with a term up to nine months. Because the fair market value  of the promissory notes may be deemed to be substantially less than their face  value, and also because a portion of the consideration must be assigned to the  included warrants, the Company will be selling shares of Series B Preferred  Stock at a substantial discount to their liquidation preference, and the Company's  capital accounts may not be increased by the full liquidation preference of  the offering. 

*The Conversion of Intercreditor  Secured Debt to Equity.*Subject to the Company completing each of the transactions  constituting the 2004 Recapitalization Transactions and raising at least $3.0  million in in the equity offering not to be used for the real estate or litigation  settlement, the holders of the Intercreditor Secured Debt (with a balance, including  accrued interest of approximately $7.2 million as of July 30, 2004) have agreed  to convert $2.0 million of such debt into shares of Series B Preferred Stock  and warrants, on the same terms as the cash investors. To the extent the Company  raises new capital funding in excess of such amounts and meets other specified  conditions, including but not limited to having an effective registration of  its common stock, such holders would convert an additional amount of Intercreditor  Secured Debt equal to the amount of such new excess capital funding obtained.  The agreement also extends the due dates of the remaining notes to June 15,  2005 and gives holders of the Intercreditor Secured Debt the right to convert  all or a portion of such debt at any time on the foregoing terms, terminates  any other rights they hold to convert the Intercreditor Secured Debt at preferential  rates into new securities sold by the Company subject to their conversion rights,  and permits the Company to prepay such debt at any time without premium

*Management Changes.*  In connection with the foregoing transactions, Mr. Meehan will resign from his  position as Chief Executive Officer and receive one year's severance payments,  as provided under a contract provided Mr. Meehan by the Company in February  2004. Mr. Meehan will continue to serve as a director of the Company. Mr. Rescino  resigned his position as Interim Chief Financial Officer in June 2004 and has  not been replaced. Mr. Rescino continues to provide the Company consulting services.  

In addition, Messrs. Albert,  Diamant and Harrington have agreed to resign from the Board of Directors of  the Company effective with initial funding of the placement of Series B Preferred  Stock. The new board members selected by the investors who are parties to the  voting agreement are Raymond Yu, Dr. Fred Balister and Izar Fernbach. Mr. Meehan's  continuance as a Board member represents the fourth Board member to be elected  by the holders of the Series B Preferred Stock. 

*Capitalization of the  Company*. Assuming the 2004 Recapitalization Transactions are completed,  with an offering size of the currently-anticipated $6.9 million and all of the  outstanding Intercreditor Secured Debt is converted, the Company will have approximately  1.5 billion shares outstanding or committed for issuance. The principal investors  in Series B Preferred Stock would be: 

| Investor                                        | Series B Preferred        Stock Shares | Common Shares, including        Conversion of Series B | Common Shares from        Exercise of Warrants | Post-issuance Beneficial        Ownership (1) |
|-------------------------------------------------|----------------------------------------|--------------------------------------------------------|------------------------------------------------|-----------------------------------------------|
|                                                 |                                        |                                                        |                                                |                                               |
| Koyah      Leverage Partners, LP and affiliates | 1,017,539                              | 254,384,778                                            | 63,507,183                                     | 28.5%                                         |
| Yair      Ben Moshe                             | 547,947                                | 136,986,668                                            | 41,364,436                                     | 14.4%                                         |
| David      Maimon                               | 541,831                                | 135,457,746                                            | 41,364,436                                     | 14.2%                                         |
| Zvi      Kurtzman                               | 198,772                                | 50,665,357                                             | 24,919,936                                     | 6.1%                                          |
| Prudent      Bear Fund, Inc.                    | 162,532                                | 40,633,068                                             | 7,937,500                                      | 8.6%                                          |
| All      other (30 persons)                     | 753,959                                | 193,725,328                                            | 61,357,000                                     | 20.5%                                         |

(1) Common shares from  conversion of Series B Preferred Stock and exercise of warrants plus any beneficially  owned shares as shown in Item 12 for each investor divided by the sum of 430,923,150  shares outstanding plus the estimated total number of common shares that investors  in the Series B Preferred Stock as a group have the right to acquire plus, in  each case, the other shares as to which the particular stockholder has the right  acquire, as indicated in the applicable footnote to Item 12. Note that investors  in Series B Preferred Stock not listed in Item 12 may have beneficial ownership  positions in the Company of less than 5% that are not considered in this presentation.

There can be no assurance  that the 2004 Recapitalization Transactions will be consummated as described.

### **NOTE  19 - SUBSEQUENT EVENT (UNAUDITED)**

The 2004 Recapitalization Transactions  (see Note 18) include provisions for the settlement of outstanding litigation  with the Aries Group as described below:

*The Litigation Settlement.*  As a precondition to obtaining new funding , the Company has negotiated a tentative  litigation settlement with Zvi Kurtzman, certain other formers members of its  management, and certain other individuals, all of whom are collectively referred  to as the "Aries Group". The settlement contains mutual general releases,  mutual covenants not to sue and terminates the litigation described in Item  3 - Legal Proceedings under the heading Former Management Suits and other litigation  brought by members of the Aries Group against management of the Company. Pursuant  to the settlement, the Company would agree (i) to pay members of the Aries Group  an aggregate of $801,509 in sixteen monthly installments (which total payments  may be reduced to $726,508 if Aura timely pays all installments), subject to  acceleration if certain additional capital raising targets are met and subject  to the option to convert unpaid amounts into units of the Series B Placement,(as  described below) (ii) to reinstate approximately 14 million options and warrants  previously issued to members of the Aries Group with exercise prices not less  $0.31 per share of common stock, (iii) to issue to members of the Aries Group  new ten-year warrants to purchase an aggregate of 34,500,000 shares of common  stock exercisable at a price of $0.07 per share, (iv) issue to members of the  Aries Group 6,208,048 shares of the Company's common stock and (v) to issue  to members of the Aries Group shares of Series B Preferred Stock with an aggregate  liquidation preference of $458,583 and approximately 5.7 million seven-year  warrants exercisable at a price of $0.02, consistent with the Series B Placement  described below. Certain members of the Aries Group are also participating in  the Series B Placement. A failure of the Company to pay amounts due or issue  shares or warrants as provided by the settlement terminates the Aries Group's  requirement to fund its Series B commitment. Conversely, a failure of the Aries  Group to pay amounts due pursuant to its Series B commitment waives the Company's  requirement to pay amounts due under the settlement unless and until such payments  are made.

****

# SUPPLEMENTAL  INFORMATION

## REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM

  To the Board of Directors and Stockholders 

Aura Systems, Inc. and  subsidiaries

Our audits were conducted  in accordance with the standards of the Public Company Accounting Oversight  Board (United States) and were made for the purpose of forming an opinion on  the basic consolidated financial statements taken as a whole. The consolidated  supplemental schedule II is presented for purposes of complying with the Securities  and Exchange Commission's rules and is not a part of the basic consolidated  financial statements. This schedule has been subjected to the auditing procedures  applied in our audits of the basic consolidated financial statements and, in  our opinion, is fairly stated in all material respects in relation to the basic  consolidated financial statements taken as a whole.

Our report covering the  basic financial statements indicates that there is substantial doubt as to the  Company's ability to continue as a going concern, the outcome of which cannot  presently be determined and that the financial statements do not include any  adjustments that might result from the outcome of this uncertainty.

SINGER LEWAK GREENBAUM  & GOLDSTEIN LLP

Los Angeles, California

July 10, 2004

## VALUATION AND  QUALIFYING ACCOUNTS - SCHEDULE II

|                                                        | **Balance,        Beginning of Year** | **Additions        charged to Operations** | **Deductions                from         Reserve** | **Balance,                End of         Year** |
|-------------------------------------------------------------|---------------------------------------|--------------------------------------------|----------------------------------------------------|-------------------------------------------------|
| **Reserve for doubtful        accounts (see Note 3 and 6)** |
| February 29, 2004                                           | $244,310                              | $2,042,340                                 | $98,310                                            | $2,188,340                                      |
| February 28, 2003                                           | $        150,000                      | $        94,310                            | $        -                                         | $        244,310                                |
| February 28, 2002                                           | $        160,000                      | $        -                                 | $        (10,000)                                  | $        150,000                                |
| **Reserve for obsolete        inventories (see Note 5)**    |
| February 29, 2004                                           | $1,678,000                            | $        354,000                           | $        -                                         | $2,032,000                                      |
| February 28, 2003                                           | $1,795,411                            | $        -                                 | $        (117,411)                                 | $        1,678,000                              |
| February 28, 2002                                           | $        291,404                      | $        1,510,871                         | $        (6,864)                                   | $        1,795,411                              |
| **Reserve for investment        (see Note 8)**              |
| February 29, 2004                                           | $2,522,487                            | $        500,000                           | $        320,908                                   | $        2,701,579                              |
| February 28, 2003                                           | $        1,822,487                    | $        700,000                           | $        -                                         | $        2,522,487                              |
| February 28, 2002                                           | $        388,652                      | $        1,433,835                         | $        -                                         | $        1,822,487                              |