SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   Form 10-K/A

(Mark One)
    |X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
         OF THE SECURITIES EXCHANGE ACT OF 1934

         For the fiscal year ended.............................February 28, 2001

                                       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          (I.R.S. Employer
            Incorporation or Organization)          Identification No.)

                                2335 Alaska Ave.
                          El Segundo, California 90245
                          ----------------------- -----
                    (Address of principal executive offices)

                                 (310) 643-5300
                          Registrant's telephone number

                              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   |X|   No   |_|

       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. |X|

       On May 18, 2001 the  aggregate  market  value of the voting stock held by
non-affiliates  of the Registrant was  $227,262,739.  The aggregate market value
has been computed by reference to the last trading price of the stock on May 17,
2001.  On such date the  Registrant  had  310,227,313  shares  of  Common  Stock
outstanding.




<PAGE>



When  used in this  report,  the  word  "expects,"  "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  changes in the  Company's  expectations  with
regard hereto or any change in 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.

                                     PART I

ITEM 1   BUSINESS

A.   INTRODUCTION

     We develop,  design,  assemble and sell AuraGen(R)  induction power systems
for mobile power applications in the well established multibillion dollar mobile
power generation  markets for gensets and inverters in 3,000 watt to 15,000 watt
applications. An induction power system refers to the electromagnetic principals
of physics used where moving  magnetic  fields induce  electric  currents.  This
basic  approach  is used in  electric  motors that do not use brushes to conduct
electric  currents from one element to another and use electric coils instead of
permanent  magnets to generate the required  magnetic field. We provide a unique
and patented energy solution (see "Patents") and are the only company to provide
a proven,  commercially  available,  up to 8,500  watts of pure sine wave  power
system that is fully  integrated  into the vehicle under the hood.  Gensets that
generate  over 3,000  watts of power are  physically  too large to fit under the
hood of a vehicle and come separately with their own small engine. Our system is
capable  of  generating  full  power up to  8,500  watts  at all  engine  speeds
including  enhanced  engine idle speed for  gasoline  based  engines and at idle
speed for bigger diesel based engines.  Gensets  generally provide full power at
1,800 and 3,600 RPM (revolutions per minute),  while vehicle engines idle in the
650 to 1,200 RPM range. The high RPM on small genset engines reduces the life of
these  small  engines  and  significantly   increases   required  and  scheduled
maintenance.  The AuraGen  combines  sophisticated  mechanical  and  electronics
design,  advanced  engineering and break-through  electromagnetic  technology to
produce a highly  reliable and  flexible  mobile  power  generating  system that
creates  alternating  current  (AC) and direct  current  (DC)  electricity,  for
industrial,  commercial  and military  use.  Traditional  mobile power users are
found in construction, cable, emergency/rescue, marine, entertainment, railroad,
recreational  vehicles,   telecommunications,   tool  sales  trucks,  utilities,
municipalities,  military and  personal  use. We believe that in addition to the
traditional mobile power market for generators, due to its compactness and clean
power, the AuraGen could allow for energy  applications that were not previously
practical,  particularly in areas that require clean power such as computers and
other sensitive digital instrumentation.

B.   THE AURAGEN(R) PRODUCT

     The AuraGen is an induction machine composed of three basic subsystems. The
first  subsystem  consists of a mechanical  device that is bolted to the vehicle
engine.  The second subsystem is an electronic  control unit ("ECU") that can be
mounted  anywhere in the vehicle except under the hood.  The third  subsystem is
the mounting brackets and supporting components for under-the-hood integration.

     The mechanical  component generates  electricity when the system is rotated
by the vehicle engine in a manner similar to the conventional alternator. Unlike
the  alternator,  this device  generates  maximum power at all speeds  including
enhanced  idle speed for  gasoline  engines  and idle  speed for  larger  diesel
engines.  The ECU filters and conditions the  electricity to provide clean power
at different steady voltages.

     Our AuraGen  system is  substantially  more reliable than existing  gensets
(portable  generators).  The  increased  reliability  is due to our  engineering
design (see  "Company  Strengths")  and our approach to use the proven  standard
vehicle  engines as compared to the small  stand-alone  engines used by gensets.
The system does not require any  maintenance  (except normal belt wear and tear)
and does not have any of the starting  problems  associated  with  gensets.  The
AuraGen uses the standard  vehicle exhaust  system,  which results in a quieter,
cleaner power generating system and also produces  substantially less pollutants
compared to conventional gensets.

     The AuraGen mobile electric power solution introduces technical, economical
and environmental benefits that are not available through the use of traditional
mobile power  solutions  using gensets or inverters  (inverters are devices that
convert  battery DC to AC.  Generally in a vehicle  application  they draw power
from a battery  pack,  which then  relies on the  alternator  or shore power for
recharge).

     We believe that we are uniquely  positioned to capture a significant  share
of the  conventional  genset  market  in the 3.0 to 15 KW  range  in view of the
following factors:

o    The AuraGen' patented  breakthrough compact design is more than 50% smaller
     and  lighter  than the  traditional  solutions,  allowing  "under-the-hood"
     AuraGen  installation  in  commercial  vehicles,  powered by the  vehicle's
     existing  engine -  traditional  solutions  are too  large  and bulky to be
     integrated  into a commercial  vehicle and,  therefore,  require  their own
     independent power source.

o    The AuraGen, unlike traditional gensets, provides "clean" power required to
     operate  sophisticated  electronic  equipment,  which is a growing need for
     mobile  power market users who operate  computers  and other  sophisticated
     electronic equipment.

o    The AuraGen  results in reduced  operating  noise  levels,  compared to the
     traditional  genset.  The  AuraGen's  operating  noise  level is simply the
     vehicle  engine idle noise when  operating in the engine  on-mode and quiet
     operation  in the  engine  off-mode  with the soon  available  option  (see
     below).

o    The AuraGen is safe and user  friendly.  The user  simply  pushes the start
     button and then uses the traditional  power outlets to plug in conventional
     tools or instruments. Unlike traditional gensets, there are no hot surfaces
     to touch,  no need to add fuel to a hot  engine,  nothing to lift or carry,
     and the AuraGen is not easily stolen.

o    Unlike  traditional  gensets,  the AuraGen requires no scheduled service or
     maintenance,  which translates into substantial life cycle cost savings and
     elimination of costly user "down time."

o    We expect to  introduce  in the  second  quarter  an engine  off mode as an
     available  AuraGen  option,  with the batteries  charged  directly from the
     AuraGen during normal vehicle use. This option will allow  continued  quiet
     operation  of the AuraGen  when the vehicle  engine is turned off, and will
     eliminate the need for "shore power" to charge batteries.

     The AuraGen environmental  benefits are highlighted by a major reduction in
air  pollution  generated  from an  existing  vehicle  engine  with all the smog
controls and  regulations,  when  compared to stand alone small  genset  engines
without all the pollution  requirements on vehicle engines. It is estimated that
the air pollution  savings using the AuraGen on a standard vehicle engine over a
typical genset could be as much as 95% for CO (Carbon  monoxide) and 82% for NOx
(nitrogen oxide compounds).

     We sell two basic systems with a number of options.  The systems  currently
available  consist of 5,000  watts  continuous  with 7,200  watts peak and 8,500
watts  continuous  with 9,000 watts peak, all at 120/240 volts pure sine wave 60
Hertz.  In addition,  both of the above systems are available in  configurations
that divide the maximum power  between AC and DC. The DC available  power can be
either 14 Volt or 28 Volt.  In the second  quarter  of Fiscal  2002 we expect to
offer a new model that will be able to  generate  up to the 5,000 watts of power
with the vehicle engine either turned on or turned off,  totally  transparent to
the user.  This new model  will use  auxiliary  batteries  as a power  source in
conjunction  with the  AuraGen  to  generate  pure sine wave AC power  while the
engine is turned  off.  As soon as the engine is turned on, the system  switches
automatically,  without any dips or spikes,  to the  standard  configuration  to
generate  power and at the same time the AuraGen  charges the  batteries  at the
maximum safe charging speed of up to 200 amps.

     We provide  custom  engineered  brackets for both the 5,000 watts and 8,500
watts  systems  that cover over 90  different  engine  models.  Our brackets are
designed to fit most General Motors  gasoline and diesel engines from 4.8 to 7.4
liters,  Ford  gasoline  and diesel  engines  from 4.2 to 7.3 liters and Daimler
Chrysler  5.2  to 5.9  liter  engines.  In  addition  we  have  designed  custom
engineered  brackets for numerous diesel engines  provided by American  General,
Cummins, Detroit Diesel, Navistar, Caterpillar and Freightliner. We also provide
power-take-off  (PTO) as well as  hydraulic  driven  interfaces  for the  bigger
trucks.

C.   TARGETED MARKETS

     The North  American  market for mobile  generators  in 3,000 watt to 15,000
watt  applications  is  estimated  to be in  excess of $4  billion  per year and
growing at 4% to 5% per year (see SIC 3621 Motors & Generators  Economic Summary
EC97M-3353B,  U.S. Census Bureau,  Nov. 1999, ITC Data Base, U.S.  Department of
Treasury,  Dec 1999 and Industrial Data Base, National Electrical  Manufacturers
Association,  Dec. 1999).  The worldwide use is estimated to be over $10 billion
per year.

     1.   Military and Other Federal Agencies

     One targeted market where our AuraGen VIPER (the name given by the US Army)
could be used with great  advantage in both cost and  logistics is the military.
In military applications, getting quiet, clean power from vehicles at low engine
speed  could be  critical  as the Army  changes  to  digital  applications  with
numerous  sophisticated  electronics and sensors.  We are currently working with
the US Army in evaluating  the use of the AuraGen in multiple army vehicle types
(see "Certain Risk Factors").  We are also pursuing  business with other Federal
agencies  including  the  FBI,  Border  Patrol,   Post  Office,   Department  of
Transportation (DOT) and Department of Energy (DOE).

     2.   Telecommunications

     Telecommunications  is an important targeted market for our product because
the industry regularly uses mobile power in its daily activities.  This industry
needs  reliable,  clean mobile power that can be used for sensitive  instruments
and provide  brute power for  compressors  and tools.  In addition  the industry
needs a user friendly integrated solution,  so that employees can focus on their
jobs. Our product is a perfect fit for the needs of this industry. Currently the
AuraGen is used in limited quantities by a number of broadcasting TV stations in
their mobile news vehicles as well as, a number of cable and telephone companies
for numerous applications.

     3.   Recreation Vehicle ("RV")

     A University of Michigan study states that 8.6 million households currently
own an RV. In 1999, RV manufacturers  shipped over 320,000 units. The University
study also projects that RV-owning  households  will grow to 10.4 million in the
year 2010.  Our product offers  significant  advantages and benefits to RV users
who need electric power.  These benefits include fuel savings (using only the RV
engine), reduced maintenance costs (no required scheduled maintenance), no power
derating  due to  altitude or  temperature  and the ability to use the system in
camp  grounds  without  noise  (using the engine  off mode).  Our system  causes
significant  reduction in pollution  when compared to the existing  gensets.  In
addition,  since the AuraGen is located under the hood the AuraGen  system frees
up  additional  space  that  can be  used  for  storage.  The  AuraGen  is  also
competitive in price with gensets used in the RV industry.

     4.   Utilities

     Utilities  are a major market for the AuraGen  because they are heavy users
of mobile  power in their  maintenance  and  service  activities.  In  addition,
utilities  are  generally  responsible  for traffic  lights within their service
areas.  The technical  advantages of the AuraGen have  generated a high level of
interest from utilities  across the U.S. In addition,  for many existing traffic
light systems,  our product appears to be the only mobile power system available
which  provides the required clean power at constant 120 volts that is needed to
power the lights when electric power is interrupted.  Power  interruption can be
caused by many events including, among others, power outages and damage to power
lines  caused by  accidents  or weather.  Numerous  utilities  in the U.S.  have
purchased  limited numbers of our units and are evaluating the AuraGen for their
applications and requirements.

     5.   Emergency Rescue

     The Emergency and Rescue market consists of fire-trucks, ambulances, police
vehicles and vehicles from other  organizations  used during  emergencies.  This
industry  is a heavy  user of  mobile  power  for  lights,  communication  gear,
instruments,  medical  equipment and numerous  digital  equipment and tools. The
industry is undergoing a transition to digital equipment and portable  computers
and has experienced  constant growth in mobile power needs. Our product provides
an effective  solution to the needs of this industry.  Many  organizations  have
already started to use our units.

     6.   Catering

     The mobile  food  industry,  in  addition  to  traditional  party and event
catering,  delivers  perishable  food to remote  locations.  Today,  some of the
catering  trucks  still use ice for their  refrigeration  needs while others use
compressors.  New  health  department  regulations  in some  jurisdictions  will
require  fans in  trucks  that  are  used  for  cooking.  The  need  for  mobile
electricity  for  refrigeration,  microwaves and other  appliances is constantly
growing,  fueled by regulation and customer need. The AuraGen,  with its ability
to produce electric power both while the engine is off and while driving,  is an
excellent and cost effective solution to this industry's needs.

     7.   Public Works/Construction

     We have targeted  public works and  construction as a market because of the
large number of  municipalities  and  construction  companies  that use portable
power on their projects.  Many  municipalities  are already using our product in
limited quantities in their service and work trucks. We provide significant cost
savings when total life cycle costs are calculated. Our product does not require
scheduled maintenance,  which results in more hours on the job. The public works
and  construction  industry is changing with the  introduction  of computers and
other sensitive digital equipment in the field. These changes require clean pure
sine wave power in order to function efficiently at the job sites.

D.   COMPANY STRENGTHS

     Our unique position in  under-the-hood  mobile power  generation stems from
approximately ten years of innovative research and development.  This effort has
culminated in our unique,  patented,  fully vehicle integrated products that are
totally  transparent  to the users and  provide  clean  pure sine wave  power to
industrial, commercial and military users through their vehicles.

     1.   Technology Leadership

     We have an engineering  department with extensive experience in mechanical,
electrical,  software, manufacturing and system engineering. In addition we have
a strong dedicated team that continuously  develops engine mount systems for new
applications.  All  engineering,   including  specifications,   acceptance  test
criteria, packaging and documentations, are done in-house.

     Our  technology  allows for the  manufacture  of induction  machines with a
one-half to  two-thirds  reduction in weight and size for the same  output.  The
machine  itself  does  not use any  exotic  materials  and  the  components  are
relatively simple to manufacture with conventional tooling. In addition to these
mechanical  advantages,  the system  uses a  proprietary  control  system  which
optimizes  efficiency as a function of required  load.  While the technology has
widespread applications over a large range of horsepower,  our products are best
utilized  for  machines  in the range of 1.5 to 50  horsepower  (1,000  watts is
approximately equal to 1.5 horsepower).

     2.   Quality, Reliability and Safety

     Our Company grew out of the defense and aerospace  industry.  Thus, quality
and  reliability  are an integral part of our business  culture.  The AuraGen is
designed for quality, reliability and safety in heavy industrial, commercial and
military usage.

     To ensure quality we use highly qualified suppliers,  the majority of which
are ISO 9002  compliant.  The  Company  performs  qualification  testing  on the
AuraGen hardware  components,  the electronic  control unit, all software and on
fully  installed  in-vehicle  systems to ensure  reliability  in the field.  The
qualification  testing  includes:  1) in-house  endurance  testing,  2) in-house
parametric thermal testing,  3) in-house power quality testing and 4) laboratory
environmental  testing.  Also, field failure analysis is performed on any failed
units.

     In  addition  to  qualification  testing,  we have  established  a  Quality
Management  system  and are  independently  pursuing  both  ISO 9001 and QS 9000
registration  (see  "Certain  Risk  Factors").  Elements  include  a  controlled
manufacturing lot traceability system,  documentation and configuration  control
system,   as  well  as  acceptance   test  and  compliance   procedures  at  all
manufacturing  levels,  including  suppliers.  We also use  Statistical  Process
Control  ("SPC"),  In-Process  Inspection  and  Functional  Test on our  AuraGen
assembly line.

     We have designed the AuraGen system for durability,  with balanced magnetic
fields,  oversized  bearings for long life,  and  insulation and varnish well in
excess  of  operating  condition  requirements.  We  have  performed  laboratory
destructive  testing to determine  when the system could fail and thus establish
upper performance limits. We have designed the system and set the specifications
to be well below the upper performance limits with significant  margins. We have
conducted  extensive  testing of our AuraGen in both the  laboratory  and in the
field. We have thousands of units in the field,  providing a good sample set for
reliability  analysis.  The results  show very small  failure  rates,  which are
constantly  being reduced with better training and some small  adjustments.  The
U.S.  Army has  tested  and is  continuing  to test  the  AuraGen  under  severe
conditions,  including airdrops. The Army has started to use the VIPER (the Army
name for the AuraGen) for special  operations.  In our  laboratory,  units under
test are continuously cycled through demanding endurance operating environments.

     The AuraGen system was designed for safety by including built-in protection
for the  user and the  machine.  For user  protection  we have an  over-voltage,
over-current  shutdown.  We use GFI  plugs,  super  fast  circuit  breakers  and
over-RPM  shutdown.  All the high  voltage  lines are encased in grounded  metal
conduit and any fault causes the throttle control to mechanically  disengage. In
order to protect the system we designed automatic shut downs for short-circuits,
overheating, battery voltage line interruption and throttle control failure. The
battery lines are protected with re-settable fuses.

     3.   Product Support

     We are a system  house  that  provides  a turnkey  product  and  service to
support our  customers in every area.  We perform all of the  development,  from
basic physics to detailed engineering. This fundamental ability provides a solid
foundation  to  resolve  technical  issues,  develop  an  ongoing  line  of  new
applications  and to continually  enhance our products.  We have fully developed
training  materials and provide routine  training to installers  nationwide.  We
provide field support  through  regional  resident field  engineers.  We provide
technical information,  documentation and software through installation manuals,
catalogs and service bulletins. Our installation software includes a "Call Home"
feature  and  remote  diagnostic  capability.  We track  performance  and  field
failures to enhance product reliability and customer satisfaction.

     Our 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 with other mobile drives,  such as hydraulic  systems and Power Take Off
("PTO").

     We provide a three year standard  warranty for our  products.  The warranty
has no hidden  exemptions  and can be extended for an additional two years for a
cost of $450.

     4.   Strong Management Team

     We have a strong  management  team in  place  with  significant  experience
covering all principal  functional  areas.  We have extensive  experience in the
development  of  new   technology  and  advanced  new  products.   Our  team  is
particularly  strong  in  transforming   technology  into  industrial  products,
producing  high  quality  and  reliable  products  and  establishing  sales  and
distribution channels.

E.   OUR STRATEGY

     Our  objective  is to be a world class  leader,  developer  and supplier of
fully vehicle integrated mobile electric power systems.  The key elements of our
strategy are:

     1.   Aggressively Protect Our Intellectual Property

     We believe that a policy of actively protecting our patents and know-how is
an  important  component  of our  strategy  to retain  our  unique  position  in
under-the-hood  mobile  power  generation  and will  provide us with a long term
competitive  advantage  (see  "Patents").  In order to maintain  and  constantly
increase  our know-how we believe that it is critical for our company to stay in
tune with the product,  future developments,  improvements and enhancements.  In
order to  address  these  issues all of our  engineering  and  documentation  is
totally under our control and performed by our staff. We have fully  implemented
this strategy with our strong engineering and support team.



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     2.   Out Source Manufacturing

     We realized that there are many quality  manufacturing houses with existing
capacity  resources  and  capability  that  can  economically  build  parts  and
components to our  specifications  and  drawings.  Thus we decided to have third
parties  custom  build  the  different  sub-assemblies  for us. We  acquire  the
sub-assemblies  and assemble them into finished  goods on our assembly  line. We
test  every  unit under high speed  before it is  packaged  for  shipment.  This
strategy  ensures that we do what we know best without  committing large capital
investments  for plants and  equipment.  We also  retain full  control  over the
product and the quality of the finished goods.

     3.   Market Positioning

     We are  positioning  ourselves in the marketplace as a turnkey mobile power
solution that is safer, more reliable, more convenient,  with better quality and
at an effective cost. Our safer solution  includes the following:  1) no need to
carry fuel in a  container,  2) no exposed hot  components  to  touch/start,  3)
nothing heavy to lift, 4) no pull start required,  5) power outlets located away
from hot components, and 6) not easily stolen.

     We provide  users of mobile  power with  effective  value.  When total life
cycle  cost is  considered,  our  product  saves the user  significant  cost and
increases  productivity.  Even  more  value is added  due to the built in safety
features.

     4.   Near Term Market Opportunity

     We have  developed  an  approach  that  we  believe  can  create  within  a
reasonable time frame, the awareness and the required  infrastructure to attract
users for the AuraGen.  The Company's marketing approach consists of three basic
components.  The first  component is an  educational  and awareness  campaign in
which  the  AuraGen  and  its  capabilities  are  presented  to  industrial  and
commercial users. This is achieved through trade shows, publications and private
demonstrations to fleet managers and other opinion setters. The second component
is the  establishment  of a  distribution  network  for sale,  installation  and
service.  We now have key  customers  covering 25 states.  These  customers,  in
addition to sales activities,  provide us with an infrastructure  with 24 hour a
day, seven days a week service.  The key customers include Stewart and Stevenson
Services,  Inc.,  which cover fourteen  states,  Williams Detroit Diesel Allison
covering eight states,  and Inland Detroit Diesel Allison  covering three states
and CRS covering one state. These companies purchase AuraGen product from us for
installation on vehicles they provide in turn to their customers and on vehicles
owned by their  customers.  They service  multiple  fleets and  industries  with
multiple  applications for mobile power. Our agreements with these customers are
non-exclusive  and  continue  for a  period  of one  year.  We  expect  to  have
distribution established throughout most of the country by the end of the second
quarter  of  2001.  The  third  component  consists  of  establishing  strategic
relationships  with industrial and commercial OEMs. We have started  discussions
with a number of such OEMs and expect to expand such  activities  throughout the
year (see "Certain Risk  Factors").  Before  significant  OEM  agreements can be
reached we need to have a national footprint for service and installation.

     5.   Develop Long Term Market Opportunity

     We expect that business  relationships  with the major automotive OEMs such
as General Motors,  Ford and Daimler  Chrysler will develop more slowly than our
near term market  opportunities  with customers and the industrial  OEMs. We are
working with General Motors (see "Certain Risk Factors") and Ford on a number of
activities  that  may  develop  into OEM  relationships.  We have  started  some
preliminary exploratory discussions with Daimler Chrysler.

     We are working closely with numerous U.S. Army organizations to include the
VIPER in their  requirements.  Early VIPER  adopters in the Army such as Special
Forces and the 82nd Airborne are reporting  very favorably on the usefulness and
performance of their VIPER units.  We expect to continue to penetrate  different
Army applications through numerous ongoing and new activities.

     6.   Broaden and Enhance Our Product Line

     We believe  that  research  and  development  is  essential  to improve our
product,  develop additional options and maintain a leadership position. We have
a strong team dedicated to product  improvements and  incorporating our magnetic
technology into different power levels and options.  Our present  strategy is to
develop  12,000  watts and  25,000  watts  machines  in  approximately  the same
physical envelope as the current systems.  We also plan to develop a 3,500 watts
system in a smaller package.  In addition we plan to develop an AuraGen for salt
water  and  other  marine  applications.  Our  development  group is  constantly
developing new applications for the AuraGen (see "Certain Risk Factors").

F.   CERTAIN RISK FACTORS

     Our  business  is  focused on the  AuraGen  family of  products.  While the
technology for the AuraGen is fully  developed and has been  extensively  tested
and  verified,   there  are  significant  risks  associated  with  developing  a
marketplace for such a new product. The risk factors are discussed below.

     1. The AuraGen,  while a new unique  product  with  limited  history in the
marketplace,  addresses a multi-billion  dollar market for mobile  generators in
the 3,000 to 15,000 watt range (see Targeted  Markets,  Part I(C) above).  There
can be no assurances that any new product will succeed in the marketplace.

     2. Our product is targeted for the mobile  power  generation  market.  This
energy  generation  market is mature,  with  traditional  solutions  provided by
mobile generators known as gensets.  Gensets are well known and have been in use
for about 50 years,  creating an  environment of  well-entrenched  suppliers and
users that are not used to  change.  This  environment  may slow down the market
acceptance of our product.

     3.  Because  our  product  is  radically  different  from  the  traditional
available mobile power solution, users may require lengthy evaluation periods in
order to gain confidence in the product. After such evaluation we expect initial
incremental increases in adopting the product before major market penetration.

     4.  Consistent  planned  monthly  sales for our product  could  possibly be
generated from OEMs and large fleet users with whom we are in discussions. These
organizations  require  considerable  time to make changes to their planning and
production.  In  addition,  delays  can  be  caused  by  prior  commitments  and
schedules.  No assurances can be given as to the time elements  involved  before
our product is  integrated  into some of these  potential  large  fleets and OEM
users or if it will.

     5. The Company is currently  working with General Motors.  At the SEMA show
in November 2000 General Motors  exhibited the AuraGen as a potential  option in
four selected  future  concept  vehicles.  No  assurances  can be given that the
Company's AuraGen will be offered by General Motors as an OEM option.

     6. We intend to expand the product line to include  other power levels such
as 12,000  watt and  25,000  watt  systems as well as a 3,500  watt  system.  No
assurances  can be given when these  additional  products  will be available for
sale.

     7. We started a program in 2000 to be ISO 9001 and QS 9000  certified.  The
process normally takes 18 months. No assurances can be given as to if or when we
will be certified.

     8. The  AuraGen is  currently  configured  for 110 and 240 volts.  The 240V
systems that are in use in other countries are different from the U.S.  240-Volt
system.  The  Company  is  currently  providing  a  solution  that  requires  an
additional  transformer  for  foreign  countries  that use 240  Volts.  A future
solution will eliminate this additional transformer by changes to the electronic
control unit. While the changes are straightforward, they do require redesign of
some circuit boards.  No assurances can be given when the required  changes will
be made.

     9.  Currently,  our  product  is being  evaluated  by the U.S.  Army with a
potential for a number of contracts that could potentially  involve thousands of
military  vehicles.  No assurances  can be given when or if such  contracts will
materialize and what the ultimate size of the contracts may be.

     10. We recently sold to the U.S.  Army a number of 10,000 watts VIPERS.  No
assurances  can be given that the Army will purchase any material  quantities of
this product.

G.   HISTORICAL SUMMARY

     The Company, Aura Systems Inc., a Delaware corporation, was founded in 1987
to engage in the development,  commercialization and sales of products,  systems
and  components   using  its  patented  and  proprietary   electromagnetic   and
electrooptical  technology.  Since 1987 the Company's  proprietary  and patented
technology  has been  developed for use in systems and products for  commercial,
industrial, consumer, and government use.

     Prior to Fiscal 1992, the Company was engaged in various military programs,
which  allowed the Company to develop its  electromagnetic  and  electro-optical
technologies and applications.  A number of  "one-of-a-kind"  systems were built
and  successfully  tested in the  field.  Subsequently,  the  Company  developed
additional  electromagnetic  and  electro-optical  know-how and  technology  and
transitioned from a supplier of defense technology to a supplier of consumer and
industrial-related products and services.

     In  1994,  the  Company  founded  NewCom,  Inc.   ("NewCom"),   a  Delaware
corporation,   which  engaged  in  the  manufacture,   packaging,   selling  and
distribution of  computer-related  communications  and  sound-related  products,
including modems, CD-ROMs, sound cards, speaker systems and multimedia products.
In September 1997,  NewCom  completed an initial public  offering,  and over the
next year and a half Aura's  ownership  decreased  and by  February  1999 Aura's
ownership dropped to a minority position of approximately 41%. During the second
half of Fiscal 1999, NewCom's business suffered from adverse industry conditions
resulting from increased incorporation of computer peripherals at the OEM level.
These  conditions  resulted  in heavy  losses  to  NewCom  and its  competitors.
NewCom's  business  reached a critical  juncture in the fourth quarter of Fiscal
1999 when Deutsche Financial Services, which maintained NewCom's working capital
line,  announced that it was unwilling to continue to advance working capital to
NewCom under its credit facility and subsequently seized NewCom's assets. NewCom
ceased operations in early Fiscal 2000.

     In  1996,  the  Company  acquired  100% of the  outstanding  shares  of MYS
Corporation  of Japan  ("MYS")  to expand  the range of its sound  products  and
speaker  distribution  network.  MYS  engaged  in the  manufacture  and  sale of
speakers and speaker systems for home,  entertainment  and computers.  In Fiscal
2000,  the  Company  sold MYS back to the  original  owners who were part of MYS
management.

     Aura anticipated that its working capital needs in Fiscal 1999 would be met
from a number of sources, including the repayment by NewCom of approximately $20
million of  indebtedness,  which was due in September  1998,  and proceeds  from
external debt and equity financing.  Due to NewCom's financial condition, it was
unable to meet its obligations to Aura in September 1998,  ultimately creating a
significant cash shortfall to Aura. This required Aura beginning in January 1999
to refocus its operations by shutting down certain operating divisions,  selling
its MYS subsidiary,  selling  proprietary based AuraSound speaker technology and
assets, and leasing its Electrotec concert touring sound equipment.  The Company
sold the assets of its ceramics  facility  effective  March 1, 2000. The Company
also temporarily  suspended the further  development of certain  electromagnetic
projects,  including the  electromagnetic  valve actuator  ("EVA" see "Our Other
Technologies").

     In Fiscal  2000 the  Company  entered  into  agreements  providing  for the
restructuring  of more than $85 million of debt and contingent  liabilities.  Of
this amount, over $37 million was either converted into equity or forgiven.  The
Company is continuing to focus on debt reduction through  payments,  settlements
and  conversion  into  equity.  By the end of May  2001 the  Company's  debt has
declined to approximately $31 million of which approximately $5.2 million is the
mortgage on the real estate property.

H.   OUR OTHER TECHNOLOGIES

     Historically we developed  electromagnetic and electrooptical  technologies
with broad  applications  for  industrial,  commercial  and consumer use.  These
technologies were transformed into specific  applications.  During the Company's
refocus and restructure in 1999 and 2000 most of the  applications  were sold or
discontinued.  While our  involvement has been  temporarily  suspended we retain
significant  interest  in  two  technology  applications,   the  electromagnetic
actuators and actuated  mirror  array.  At some time in the future we believe we
will revive our activities in these two areas.

     1.   Electromagnetic Actuator (EMA(TM))

     During  Fiscal 1995,  we developed,  built and  demonstrated  a new type of
actuator, called the Electromagnetic Actuator, or "EMATM." We developed EMATM to
fill the  performance gap between linear  actuators and solenoids.  To date, the
principal  application  of the  EMATM  has  been  in our  Electromagnetic  Valve
Actuator  System  ("EVA(TM)"),  a patented  electro-magnetically  powered system
which opens and closes engine valves at any user specified time interval.

     EVA(TM) is an  electromagnetic  actuator  capable of  opening  and  closing
internal  combustion  engine  valves,  replacing the  mechanical  camshaft on an
engine.  Two major  benefits  arise from the EVA's ability to open and close the
valve  electro-magnetically:  1) the camshaft and associated mechanical hardware
can be  eliminated;  and 2) the  opening  and  closing of the intake and exhaust
valves can be commanded by the engine  computer.  Computer  control of the valve
timing has potentially material benefits to engine performance, fuel economy and
emissions.

     In recent years,  we entered into  agreements with 15 companies to retrofit
EVA's on  different  types of diesel,  automobile  and  motorcycle  engines  for
evaluation  and  testing.  During  Fiscal 1998 an EVA system was  delivered to a
major  domestic  Original  Equipment  Manufacturer  (OEM)  for  the  purpose  of
evaluating EVA for possible use in its automobile production. In Fiscal 1998, we
developed a new, more reliable servo control system that provides  reduced power
usage and  reduced  noise over the entire RPM range.  In  addition,  the Company
started work on an improved latching  mechanism for EVA that will further reduce
noise in the system.

     In  Fiscal  1999 as part  of our  refocus,  we  temporarily  suspended  our
activities  on  further  EVA  development  and  commercialization  to focus  our
resources on the  AuraGen.  The Company is however,  pursuing  licensing of this
technology  to third  parties.  We have not entered into any  discussions  for a
licensing agreement for EVA.

     2.   Light Efficient Displays - Actuated Mirror Array (AMATM)

     We developed and patented a technology (a "light  valve") for generation of
images called the Actuated Mirror Array (AMATM).  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. We believe 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.

     Although  there can be no assurances,  the Company  believes that the AMATM
can be manufactured at a competitive  cost in large  quantities,  thus making it
commercially  feasible.  Thus,  AMATM based devices are expected to  potentially
offer the combination of increased display intensity at a competitive production
cost. The Company believes that the AMATM  technology has a technical  advantage
over other technologies in achieving higher contrast,  more intensity and longer
lived elements.

     We  entered  into  a  license  and  manufacturing   agreement  with  Daewoo
Electronics  Co.,  Ltd. to  manufacture  televisions  and other devices based on
AMATM technology. To date Daewoo invested substantial funds to commercialize the
technology.  However,  in the last year a number of crises have caused Daewoo to
be taken over by its creditors.  Currently we are negotiating  with Daewoo about
the future of the AMA technology.

I.   COMPETITION

     We are  applying  our  AuraGen  technology  to a variety  of  mobile  power
generating  products and services and, as such, we face substantial  competition
from  companies  that have been offering  traditional  solutions such as gensets
(portable  generators)  for the last 50 years.  In addition we face  competition
from companies that offer inverter (a device that inverts battery direct current
electricity to alternating current) solutions for the last 20 years.

     We believe that the  principal  competitive  factors in the markets that we
target  include  the  ability to develop  and  market  technologically  advanced
products to meet changing market conditions, price, reliability, product support
and the ability to secure sufficient capital resources for the often substantial
periods  between  technological  concept and  commercialization.  Our ability to
compete will also depend on our continued  ability to attract and retain skilled
and experienced  personnel and to exploit  commercially  our technology prior to
the development of competing products by others.

     We compete with many companies that have more experience, name recognition,
financial  and other  resources  and expertise in  manufacturing,  testing,  and
obtaining regulatory approvals, marketing and distribution.

     1.   Gensets

     Gensets meet a large market need for auxiliary power. Millions of units are
sold per year in North  America  alone,  and  millions  more are sold across the
world to meet market demands for 1 to 10 kilowatts of portable power. The market
for  these  power  levels  basically  addresses  the  commercial,   leisure  and
residential markets.

     The  market  in  industrial  grade  portable  power  is  dominated  by such
companies as Onan,  Honda and Kohler,  which are well  established and respected
brand names. The principal  advantage of gensets over our product is their stand
alone operational  capabilities.  Unlike the AuraGen, gensets do not require the
presence of an  automobile  to operate  since they come with their own  internal
combustion engine. There are presently 44-registered genset manufacturers.

     The  following  table is a summary of  physical  parameters  comparing  the
leading genset products with the 5,000 watts AuraGen(TM).
<TABLE>
<CAPTION>

                               TABLE 1: GENERATORS

                                     Onan             Honda            Honda            Kohler         AuraGen(TM)
          Parameters             Marquis 5000        EG5000X           EX5500            5CKM            G5000
  ---------------------------- ------------------ --------------- ----------------- --------------- ----------------

<S>                                 <C>              <C>              <C>              <C>              <C>
  Rated Power                       5,000 W          4,500 W          5,000 W          5,000 W          5,000 W
  Weight                            258 lb.          146 lb.          393 lb.          268 lb.          68 lb.
  Derated Power                       Yes              Yes              Yes              Yes              No
  Volume                           6.72 ft3          5.39 ft3        26.80 ft3         3.71 ft3        0.25 ft3
  Output                             120 V          120/240 V        120/240 V        120/240 V        120/240 V
  Engine RPM                         1,800            3,600            3,600            1,800         750 diesel
      @ Rated Output                                                                                   1,250 gas
  Noise (db @10 Ft.)`                73.5               82               65              88.5             64
  Load-Follower Economy               No                No               No               No              Yes
</TABLE>

     As  can  be  seen  from  the  table  the  AuraGen  volume  and  weight  are
substantially lower than traditional gensets.  Genset power rating is set at sea
level and 60 degrees  Fahrenheit  with  derating  due to  altitude  and  outside
temperatures.  In  addition  the  AuraGen in use  generates  less noise than the
competing  gensets.  Our  product  unlike  the  leading  gensets,  uses a  "Load
Following"  technique  in which the amount of electric  power  generated  at any
given  moment is equal to the maximum  power  possible or the  required  demand,
whichever one is lower.  Traditional  gensets always produce their maximum power
at any given time.  This Load Following  ability  provides  operational  economy
since often the required power at any time could be substantially lower than the
maximum power that can be produced.

     2.   Inverters

     In addition to competition from gensets,  there are six major manufacturers
of inverters in the United States including Vanner, Dimension and Heart.

     Inverters are generally used in limited and  specialized  markets where the
power  requirements  are at the 2,500 watts level.  When  inverters are used for
higher than 2,500 watts they  require a 24 volt  system.  Furthermore  when sine
wave output is required the cost of inverters is significantly increased. Often,
inverters  require an upgraded vehicle  alternator and battery harness,  and for
extended use periods  without  battery  charging they also require an additional
battery pack.  Inverters when used, drain the batteries and as such, heavy users
of inverters  usually  charge up their  batteries with shore power during unused
hours.

     Traditionally  inverters are used in ambulances,  fire and rescue vehicles,
small recreational  vehicles and  telecommunications  applications.  In the last
several  years the  power  requirements  of these  traditional  users  have been
increasing and inverters have not satisfied many users when used in higher power
applications.  Inverters when used in high power situations are stressed and may
cause life cycle problems on the alternators and other electrical components.

J.   MANUFACTURING

     We assemble and test the AuraGen at our 27,690  square foot  facility in El
Segundo,  California with  subassemblies and parts which are produced by various
suppliers.  In  Fiscal  1998,  we set up the  above  facilities  with a  maximum
production  capacity of 5,000 units per month per 8 hour operating shift. By the
end of May 2001 the assembly line was utilized at approximately 20% of capacity.
We expect that the facility  utilization will  significantly  increase in Fiscal
2002 due to increasing shipments of parts from our suppliers,  the establishment
of major customers, and potential OEM agreements.

K.   PRODUCT DEVELOPMENT EXPENDITURES

     During the fiscal years ended  February 28,  2001,  February 29, 2000,  and
February 28, 1999 the Company spent  approximately $ 0.5 million,  $ 0.1 million
and $2.0 million,  respectively, on Company research and development activities.
The Company  plans to continue its research and may incur  substantial  costs in
doing so. All of the  Company's  R & D is  currently  focused  on  technological
enhancements and product developments for the AuraGen.

L.   PATENTS

     The Company's Intellectual property portfolio consists of valuable patents,
trademarks,  and trade secrets. We believe that the protection of our technology
is an  important  element of our  overall  business  strategy.  We filed and are
continuously filing applications worldwide for patents and trademarks.  The U.S.
Patent  Trademark Office has to date issued in favor of the Company seventy nine
patents and numerous registered  trademarks.  In the prior two fiscal years, the
company  sold or  discontinued  certain  operations  which  involved a number of
patents and trademarks.

     Our active  portfolio  presently  consists of a total of forty three issued
U.S.  patents  and six  registered  trademarks.  Twenty five  patents  relate to
electro  magnetic  automotive and industrial  applications  and eighteen patents
relate to electro-optical  technology.  Two of the  electromagnetic  patents are
fundamentally  and  directly  related to the  AuraGen  which  utilizes  imbedded
electromagnetic  technology.  Nine  additional  basic  actuation  patents  cover
designs where rare earth magnets could  potentially be used to build both linear
and rotary  electromagnetic  actuators and similar machines.  Two control system
patents provide specific  techniques that can be used to control magnetic fields
inside certain mechanical structures.  The control patents have wide application
and some components are imbedded in the AuraGen control system. Rounding out the
patent protection in our automotive  industrial group are twelve patents devoted
to the Company's EVA technology which cover the  implementation  of a controlled
magnetic field as applied to linear motors.  Many of the techniques  used in EVA
applications are applied to our AuraGen system.

     The balance of our  intellectual  property  portfolio  devote some eighteen
patents to  electro-optical  technology,  ranging in  application  from  optical
switching to the  Company's AMA and jointly  owned TMA display  technology  with
Daewoo Electronics Co., Ltd.

     The fundamental  AuraGen patents expire in 2017 and 2019 while the majority
of the other patents expire between 2008 and 2015.  There are additional  patent
applications  in  various  stages  of  preparation  for  filing  and a number of
applications  are in the patents pending mode.  There are no assurances that any
of the  patent  applications  or any new  other  patents  will be  issued in the
future.

M.   EMPLOYEES

     As of February 28, 2001 the Company employed  approximately 95 persons. The
Company believes that its  relationship  with its employees is good. The Company
is not a party to any collective bargaining agreements.

N.   PRINCIPAL SOURCES OF REVENUES

     For the year  ended  February  28,  2001,  virtually  all of the  Company's
revenues were AuraGen related. For year end February 29, 2000, ceramics products
were the largest single source of revenue on a consolidated basis,  constituting
approximately  $2.9  million  or 50% of net  revenues.  License  fees for  sound
related  patents  constituted  $1.5 million or 32.8% of  revenues.  For the year
ended  February 28,  1999,  multi-media  products and modems were  approximately
$46.8 million or 87.2% of net revenues.

O.   SIGNIFICANT CUSTOMERS

     The Company sold its AuraGen  product to six significant  customers  during
Fiscal 2001 for a total of approximately $1.35 million or 53.8% of net revenues.
Five of these  companies are Stewart & Stevenson  Services  entities and account
for  approximately  $1.0 million or 40% in the  aggregate  of net revenues  with
Americas  Body  Company  accounting  for an  additional  13.6% or  approximately
$340,000 of net revenues.  Going  forward,  while we expect  Stewart & Stevenson
Services,  Inc.  to  remain  a  significant  customer,  we  anticipate  that its
percentage  of overall  revenues  should  substantially  decrease.  The  Company
expects  significant  increases  in  revenues  for Fiscal  2002 with an expanded
distribution network which will include numerous other well known customers.  In
addition, the Company expects to have other OEM customers in Fiscal 2002.


ITEM 2.  PROPERTIES

     The Company owns a 46,000 square foot headquarters  facility in El Segundo,
California and a 27,690 square foot  manufacturing  facility also in El Segundo,
California for its AuraGen product. These properties are encumbered by a deed of
trust securing a Note in the original principal amount of $5,450,000.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is engaged in various legal actions  listed below.  In the case
of a  judgment  or  settlement,  appropriate  provisions  have  been made in the
financial statements.

NewCom Related Litigation

     Deutsche Financial Services v. Aura (Settled March 2001)

     In June 1999, a lawsuit naming Aura was filed in the United States District
Court for the  Central  District  of  California,  Deutsche  Financial  Services
("DFS") vs. Aura (Case No.  99-03551 GHK (BQRx)).  The  complaint  followed DFS'
termination  of its credit  facility with NewCom of  $11,000,000  and seizure of
substantially all of NewCom's collateral in April 1999. It alleged,  among other
things, that Aura was liable to DFS for NewCom's  indebtedness under the secured
credit facility purportedly guaranteed by Aura in 1996, well prior to the NewCom
initial public offering of September  1997. Aura responded,  denying DFS' claims
and asserted in its defense, among other things, that the guarantee, if any, was
discharged.  In addition,  Aura through its counsel,  asserted cross-claims for,
among other things,  tortuous  lender  liability,  alleging that DFS  wrongfully
terminated the NewCom credit facility,  wrongfully  seized the NewCom collateral
and  wrongfully  foreclosed  upon NewCom  collateral,  acting in a  commercially
unreasonably  manner.  A panel  of  three  arbitrators  had  been  selected  and
appointed by the American Arbitration Association,  with the Company expecting a
hearing on the matter  sometime in the first half of 2001. The Company  believed
it had meritorious defenses and cross-claims.

     The  company  entered  into a  definitive  Settlement  and  Mutual  Release
Agreement  effective  March  12,  2001  (the  "Settlement")  providing  for  the
settlement of  litigation.  Under the terms of the  Settlement  DFS will receive
cash payments  totaling $350,000 and 10,000,000 shares of Aura's common stock in
exchange for mutual  releases.  DFS may not sell more than 5,000,000  shares per
year  during  the first two years  following  the  settlement,  may not sell any
shares for the first 120 days  following the  settlement,  and may not sell more
than  50,000  shares in a single day.  Aura will retain the right to  repurchase
unsold shares under  certain  conditions  for a period of two years.  During the
first and second years  following the  Settlement,  Aura may  repurchase  unsold
shares in the  possession  of DFS at a price of $.80 per share in the first year
and $1.00 per share in the  second  year.  As part of the  Settlement,  DFS will
assign to Aura its security interest in assets pledged by NewCom, Inc. to DFS to
secure NewCom's indebtedness. Aura believes that DFS has already foreclosed upon
all  known  assets,  claims,  or  entitlements,   which  include  inventory  and
receivables.  Going forward,  funds received by DFS, if any, with respect to the
assets of NewCom, less costs and expenses incurred, will be held in trust by DFS
for  Aura.  Aura  may  also  prosecute  or  pursue  a  NewCom  claim,  asset  or
entitlement,  which is  subject  to DFS'  lien.  Aura's  receipt of any funds is
conditioned  upon the bid price of Aura Common Stock reaching $0.80 per share on
ten  business  days  during the first year or $1.00 per share  during the second
year following the execution date of the Settlement. To the extent Aura recovers
any funds,  it will hold it in trust for DFS until the bid price of Aura reaches
the above levels,  respectively,  or until the 730th day following the execution
date of the  Settlement,  when Aura must then pay any recovered  funds to DFS if
the minimum bid prices set forth above have not been met.

         Morganstein v. Aura (Settled October 1999)

     On April 28, 1997,  a lawsuit  naming Aura,  certain of its  directors  and
officers,  and the Company's independent accounting firm was filed in the United
States  District Court for the Central  District of  California,  Morganstein v.
Aura Systems,  Inc., et. al. (Case No. CV 97-3103),  before the Honorable Steven
Wilson. A follow-on complaint,  Ratner v. Aura Systems,  Inc., et. al. (Case No.
CV  97-3944),  was also  filed  and  later  consolidated  with  the  Morganstein
complaint. The consolidated amended complaint purported to be a securities class
action on behalf of all persons who  purchased  common  stock of Aura during the
period from January 18, 1995 to April 25, 1997, inclusive. The complaint alleged
that as a  result  of  false  and  misleading  information  disseminated  by the
defendants,  the market price of Aura's common stock was  artificially  inflated
during the Class Period. The complaint contained allegations which asserted that
the company  violated  federal  securities  laws by selling Aura Common stock at
discounts  to the  prevailing  U.S.  market  price  under  Regulation  S without
informing Aura's shareholders or the public at large.

     In June 1998, the Court entered an order staying further discovery in order
to  facilitate  completion  of settlement  discussions  between the parties.  On
October 12, 1998, the parties  entered into a stipulation  for settlement of all
claims,  subject to approval by the Court.  Under the stipulation for settlement
Aura agreed to pay $4.5  million in cash or stock,  at Aura's  option,  plus 3.5
million  warrants at an exercise price of $2.25. In addition,  Aura's  insurance
carrier agreed to pay $10.5 million.  The settlement was finally approved by the
Court in October 1999 and was thereafter  amended in December 1999 to allow Aura
to defer  payment of the  settlement  amount until April 2000 in exchange for an
additional  2  million   shares  of  Aura  Common  Stock,   subject  to  certain
adjustments.  The deferral  resulted from the limitation on the number of shares
authorized at that time. The final  distribution  of stock and warrants to class
members occurred in June 2000.


         Excalibur v. Aura

     On November 12, 1999, a lawsuit was filed by three  investors  against Aura
and Zvi Kurtzman,  Aura's Chief Executive Officer, in Los Angeles Superior Court
entitled Excalibur Limited Partnership v. Aura Systems, Inc. (Case No. BC220054)
arising out of two NewCom, Inc. financing consummated in December 1998.

     The NewCom financing  comprised (1) a $3 million  investment into NewCom in
exchange for NewCom Common Stock,  Warrants for NewCom Common Stock, and certain
"Repricing  Rights" which entitled the investors to receive additional shares in
the event the price of NewCom Common Stock fell below a specified level, and (2)
a loan to NewCom of $1 million in exchange for a Promissory Note and Warrants to
purchase NewCom Common Stock. The Plaintiffs allege in their complaint that Aura
breached its agreements  with the Plaintiffs by, among other things,  failing to
register  the Aura  Common  Stock.  The  Plaintiffs  further  allege  that  Aura
misrepresented  its intention to register the Aura shares in order to induce the
Plaintiffs to loan $1.0 million to NewCom.  The  Complaint  seeks damages of not
less than $4.5 million.

     Aura has alleged certain cross-claims against the Plaintiffs. Aura contends
that Plaintiffs  violated their  contractual  obligations to Aura by engaging in
unlawful "short sales" of NewCom stock, commencing on January 20, 1999, and were
in violation of certain covenants in the subscription agreements.  Aura contends
that, as a result of such violations and on the basis of other factors and legal
theories,  Aura's  obligations to deliver the shares and to make any payments to
Plaintiffs  was  terminated.  Aura  further  claims  that  its  consent  to  its
agreements   with   Plaintiffs   was   procured   as  a  result  of   fraudulent
misrepresentations  by  Plaintiffs.   Aura  also  has  asserted  claims  against
Plaintiffs  for damages  based on alleged  breaches of  Plaintiffs'  contractual
obligations to Aura and on Plaintiffs' alleged misrepresentations to Aura.

     All  individually  named defendants have been dismissed by agreement of the
parties and the case is scheduled  for trial on July 17,  2001.  In May 2001 the
Court granted Aura's motion to require Plaintiffs' to post an undertaking in the
amount of $225,000 to secure any cost award that may be entered in Aura's  favor
on the basis that it is  "reasonably  possible"  that Aura will  prevail in this
matter.  Aura and the  Plaintiffs  have also moved for  summary  judgment on the
Plaintiffs' action which is scheduled to be heard on June 15, 2001.

     The Company  believes that it has meritorious  defenses and cross-claims to
the  Plaintiffs'  allegations.  However,  no  assurances  can be given as to the
ultimate outcome of this proceeding.

         Kerry Morgan, et. al. vs. NewCom, Inc.

     In December  1999,  a lawsuit was filed  against  NewCom,  Inc.  which,  as
currently  amended also includes Aura Systems,  Inc.,  Steven Veen, Sultan Khan,
Asif Khan and Zvi Kurtzman,  Deutsche  Financial  Services,  Inc., Best Buy Co.,
Inc.,  Circuit City Stores,  Inc. a/k/a Compusa,  the Computer Super Store,  and
Staples,  Inc., in the Circuit Court for the County of Wayne  Michigan (Case No.
98-838563 CP). The plaintiff's  sixth amended  complaint  purports to be a class
action on behalf of a class  alleged  to consist of  approximately  two  hundred
thousand persons who purchased a NewCom Inc., a/k/a Atlas  Peripherals  computer
product  from Best Buy Co.,  Inc.,  Circuit City Stores,  Inc.,  Computer  City,
and/or  Staples,  Inc. The complaint  alleges that  plaintiffs did not receive a
rebate of between twenty to fifty dollars on NewCom products,  as advertised and
promoted by the above mass  retailer.  Plaintiffs  further  allege that the mass
retailers without any  justification,  failed to pay NewCom for product received
and sold. The lawsuit named Aura primarily on the basis that Aura was the "alter
ego" of NewCom and seeks  unspecified  damages against Aura as well as the other
defendants. The plaintiffs seek, among other remedies, to recover all or part of
the  amount  that  the  retailers  failed  to  pay.  Circuit  City  has  filed a
cross-complaint  against NewCom, Sultan Khan, Asif Khan, Aura, Deutche Financial
Services,  Zvi Kurtzman and Steven Veen. Deutsche Financial Services has filed a
cross-complaint  against  Staples.  No  trial  date  has  been  set.  The  named
individuals have tendered  coverage of the claims to their  respective  insurers
and Aura has filed a motion for summary disposition.

     The named  individuals  are  vigorously  defending the matter and expect to
file notions for summary disposition. Aura believes that ultimately it will have
no  liability  in  this  proceeding  as  NewCom  is  an  independently  operated
subsidiary and at no time did Aura assume any of NewCom's obligations  regarding
rebates.  Aura also believes that in addition to  meritorious  defenses,  it has
cross-claims against Circuit City and other mass retailers,  as they did not pay
for the  products  they  purchased  from NewCom and then sold to  consumers.  We
intend to vigorously prove our claims and defenses.  However,  no assurances can
be given as to the ultimate outcome of this proceeding.

     Securities and Exchange Commission Settlement.

     In October 1996,  the  Securities  and Exchange  Commission  ("Commission")
issued an order  (Securities Act Release No. 7352) instituting an administrative
proceeding against Aura Systems,  Zvi Kurtzman,  and an Aura former officer. The
proceeding  was  settled on consent of all the  parties,  without  admitting  or
denying any of the  Commission's  findings.  In its order,  the Commission found
that Aura and the others  violated the reporting,  recordkeeping  and anti-fraud
provisions  of the  securities  laws in 1993  and  1994 in  connection  with its
reporting on two  transactions in reports  previously filed with the Commission.
The Commission's  order directs that each party cease and desist from committing
or causing any future violation of these provisions.

     The Commission did not require Aura to restate any of the previously issued
financial  statements or otherwise amend any of its prior reports filed with the
Commission. Neither Mr. Kurtzman nor anyone else personally benefited in any way
from these events. Also, the Commission did not seek any monetary penalties from
Aura,  Mr.  Kurtzman or anyone  else.  For a more  complete  description  of the
Commission's Order, see the Commission's release referred to above.

Other Legal Actions

     The  Company is also  engaged in other  legal  actions.  In the  opinion of
management,  based upon the advice of counsel,  the ultimate resolution of these
matters will not have a material adverse effect on financial conditions, results
of operations or cash flow.


ITEM 4.  Submission of Matters to a vote of Security Holders.

     The Company's  2000 Annual Meeting of  Shareholders  was held on January 9,
2001. At the annual meeting each of the Company's nominees were elected to serve
as directors of the Company. The election results are as follows:
<TABLE>
<CAPTION>

             Name                                For                         Withheld                  Abstain
             ----                                ---                         --------                  -------
<S>                                         <C>                             <C>                      <C>
Zvi(Harry) Kurtzman                         187,705,178                     2,091,943                1,264,362
Stephen A. Talesnick                        180,316,671                     9,480,450                1,264,362
Harry Haisfield                             188,494,140                     1,302,981                1,264,362
Harvey Cohen                                164,574,056                    25,223,065                1,264,362
Norman Reitman                              163,947,670                    25,849,451                1,264,362
Neal Meehan                                 183,529,973                     6,267,148                1,264,362
Salvador Diaz-Verson, Jr.                   189,135,281                       661,840                1,264,362
Sanford R. Edlein                           183,350,352                     6,446,769                1,264,362
William Richbourg                           183,311,927                     6,485,194                1,264,362
</TABLE>

                                     PART II


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

     Since 1988,  Aura Common  Stock has been quoted on the Nasdaq  Stock Market
under the trading symbol "AURA".  On May 21, 1991,  Aura shares became listed on
the Nasdaq National Stock Market.

     On July 21, 1999 the Company's  shares were  delisted from Nasdaq  National
Market.  This action was taken as a result of the Company's  failure to meet the
filing,  minimum $1.00 bid price and other  requirements as stated in the Market
Place Rules.  On February 1, 2001,  the Company's  shares were listed on the OTC
Bulletin Board.

     Set forth below are high and low sales  prices for the Common Stock of Aura
for each  quarterly  period in each of 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  9,600  stockholders of record as of April
30, 2001.
<TABLE>
<CAPTION>

       Period                                                             High                      Low

Fiscal 2000

<S>                                                                      <C>                        <C>
       First Quarter ended May 31, 1999                                  $0.50                      $0.22
       Second Quarter ended August 31, 1999                              $0.28                      $0.06
       Third Quarter ended November 30, 1999                             $0.51                      $0.06
       Fourth Quarter ended February 29, 2000                            $0.42                      $0.17

Fiscal 2001

       First Quarter ended May 31, 2000                                  $0.64                      $0.24
       Second Quarter ended August 31, 2000                              $0.52                      $0.20
       Third Quarter ended November 30, 2000                             $1.19                      $0.34
       Fourth Quarter ended February 28, 2001                            $0.53                      $0.29
</TABLE>

     On May 17,  2001,  the average  high and low  reported  sales price for the
Company's Common Stock was $0.75.

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 but has no restrictions preventing it from paying dividends.

Changes in Securities and Use of Proceeds

     In the fourth  quarter of Fiscal  2001,  the  Company  completed  a private
placement of 7,812,499 shares of its common stock for $2,500,000 and the Company
issued  1,675,272  shares of its common stock for the  conversion of $586,346 of
notes  payable and accrued  interest.  These  securities  were issued to a small
group of  accredited  investors  in  private  placements  in  reliance  upon the
exemption from  registration  contained in Section 4(2) of the Securities Act of
1933.



<PAGE>


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.  The data for Fiscal 1999,  1998,  and 1997 has been restated to reflect
discontinued operations.
<TABLE>
<CAPTION>

                       AURA SYSTEMS, INC. AND SUBSIDIARIES

                                            February 28,              February 29,     February 28,     February 28,    February 28,
                                                   2001                  2000            1999             1998            1997
                                            --------------           ---------        -------------    -----------    ------------

<S>                                               <C>                 <C>               <C>            <C>             <C>
Net Revenues                                      $   2,512,508       $  5,788,221      $53,650,025    $103,939,641    $  76,424,311
                                                   ------------       ------------       ----------     -----------       ----------
Cost of goods                                         1,216,637          1,957,854       83,344,562      58,045,370       48,420,015
Expenses:
   Engineering expenses                               8,214,981         11,466,449       47,092,632      13,729,152        8,610,224
   Research and development                             547,812            148,443        1,996,198         475,992        5,674,302
   Impairment of long-lived assets                      240,000                 --        5,838,466              --               --
   Selling, general and administrative               12,695,833         10,725,397       64,131,074      35,266,048       12,742,269
                                                  -------------       ------------       ----------      ----------       ----------
   expenses
         Total expenses                              22,915,263         24,298,144      202,402,932     107,516,562       75,446,810
                                                  -------------       ------------      -----------     -----------      -----------

Income (loss) From Operations                       (20,402,755)       (18,509,922)    (148,752,907)     (3,576,921)         977,501

Other (Income) and Expense
   Interest expense                                   2,263,916          4,476,690       11,679,701       6,450,741        1,181,910
   Termination of license agreements                         --                 --               --       3,113,030               --
   (Gain) loss on disposal of assets                 (1,756,746)            93,638          925,525              --               --
   (Gain) loss on sale & issuance of
   subsidiary
       stock and investments                                 --                 --        4,877,839     (12,632,265)       (250,000)
   Class action litigation & other legal              1,512,769            427,091        7,717,518       1,700,000               --
       settlements
   Equity in losses of unconsolidated joint
     ventures                                --                                 --        6,268,384       1,937,747               --
   Settlement on accounts payable                    (1,046,324)         2,350,671               --              --               --
   Other                                               (446,399)        (1,454,641)        (906,921)       (220,291)        (40,642)
   Provision (benefit) for taxes                             --                 --          566,635      (1,275,555)          13,148
   Minority interests                                        --                 --      (36,934,376)        946,405               --
   Loss in excess of basis of subsidiary                     --                 --       (8,080,695)               --             --
                                                 --------------      -------------       -----------  ---------------      ---------
Income (loss) from continuing operations            (20,929,971)       (24,403,371)    (134,866,517)     (3,597,733)          73,085
Discontinued Operations:
     Loss from Discontinued Operations, Net
     of Income taxes                                                    (4,131,501)     (14,875,065)     (8,038,807)     (2,953,196)
Extraordinary Item
     Gain on extinguishment of debt
     obligations, net of income taxes                        --         19,068,916               --              --               --
                                                 --------------      -------------      -----------     -----------        ---------
Net loss                                         $  (20,929,971)     $  (9,465,956)   $(149,741,582)   $(11,636,540)    $(2,880,111)
                                                  -------------       ------------    -------------=    -----------      -----------
Other Comprehensive loss, net of taxes                       --                 --         (406,574)             --               --
                                                 --------------      -------------     ------------      ----------       ----------
Comprehensive Loss                               $  (20,929,971)     $  (9,465,956)   $(150,148,156)   $(11,636,540)    $(2,880,111)
                                                  =============       =============    ============    =============     ===========
NET (LOSS) PER COMMON SHARE                               (0.08)     $        (0.08)   $      (1.74)  $                  $     (.04)
                                                 ===============      ==============   =============   ============        =========
                                                                                                              (.15)
 Income (loss) from continuing operations
   per common share                              $        (0.08)    $         (0.20)  $       (1.57)   $     (0.05)      $        --
                                                  =============      ==============   ==============    ===========       ==========
 (Loss) from discontinued operations per
   common share                                  $           --     $         (0.03)  $       (0.17)   $     (0.10)     $     (0.04)
                                                  =============      ===============   =============    ===========       ==========
 Extra-ordinary income per common share          $           --     $          0.15   $         --     $        --       $        --
                                                  =============      ==============     ===========      ==========       ==========
WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES                                    261,568,346         124,294,051      85,831,688      79,045,290       68,433,521
                                                  =============         ===========    ============      ==========       ==========

Working capital (deficit)                            (5,105,345)           826,213       (4,869,876)     78,143,895       62,310,715
Total assets                                         45,278,043         56,122,538       90,143,392     227,302,629      182,528,399
Long-term debt                                       38,485,108         46,951,716       34,236,944      33,968,393       18,897,631
Net stockholders' equity (deficit)                    2,045,035          1,516,008      (13,653,657)    116,901,868      125,477,587
</TABLE>


<PAGE>



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

Forward Looking Statements

     Statements in this report,  including those  concerning our expectations of
future  sales  revenues,  gross  profits,  research and  development,  sales and
marketing,   and  administrative   expenses,   product  introductions  and  cash
requirements include forward-looking statements. As such, our actual results may
vary  materially  from our  expectations.  Factors  which could cause our actual
results  to differ  from  expectations  include,  but are not  limited  to,  the
following risks and contingencies: changed business conditions in the industrial
and  automotive  industries  and the overall  economy;  increased  marketing and
manufacturing  competition and accompanying  price  pressures;  contingencies in
initiating production along with their potential under utilization, resulting in
production inefficiencies and higher costs and start-up expenses.

     Relating  to  the  above  are  potential  difficulties  or  delays  in  the
development,  production,  testing and marketing of products, including, but not
limited to, a failure to ship new products and  technologies  when  anticipated.
Manufacturing  economies  may fail to  develop  when  planned,  products  may be
defective and/or customers may fail to accept them in the marketplace.

     In addition to these factors,  risks and  contingencies may exist as to the
amount and rate of growth in the Company's  selling,  general and administrative
expenses,  and the impact of unusual items resulting from the Company's  ongoing
evaluation  of its business  strategies,  asset  valuations  and  organizational
structures.  The focus by the Company's business on any large order could entail
fluctuating results from quarter to quarter.

     The effects of, and changes in, trade,  monetary and fiscal policies,  laws
and  regulations,   other  activities  of  governments,   agencies  and  similar
organizations,  and social and economic  conditions,  such as trade restrictions
impose  yet other  constraints  on any  Company  statements.  The cost and other
effects of legal and administrative cases and proceedings present another factor
which may or may not have an impact.

Fiscal 2001 as Compared to Fiscal 2000

Revenues

     Net revenues in Fiscal 2001 totaled $2.5 million.  In Fiscal 2001 virtually
all sales were AuraGen related, up from $0.8 million in AuraGen related sales in
Fiscal 2000.  Overall net revenues declined to $2.5 million from $5.8 million in
Fiscal 2000 as approximately  $2.9 million,  or 50% of Fiscal 2000 revenues were
derived from the ceramics  facility,  with an additional $1.5 million,  or 25.9%
derived from license fees pertaining to sound related patents. The assets of the
ceramics facility were sold effective March 1, 2000.

     While the inventory levels at Fiscal 2001 year end are high relative to the
sales level for the year, this was a result of the buildup of inventory prior to
the onset of the Company's financial difficulties. The Company expects that this
inventory will be fully turned over by the end of Fiscal 2002.  Although a large
portion of the  inventory  is over two years old, the  inventory  related to the
AuraGen remains fully useable and does not require any obsolescence reserve.

Cost of Goods

     Cost of goods  for the  year  ended  February  28,  2001 was $1.2  million,
applicable  almost entirely to the AuraGen product,  resulting in a gross margin
of  approximately  52%.  Cost of goods  in the  prior  year  was  $2.0  million,
resulting  in a gross  margin of 54%,  after  excluding  the effects of the $1.5
million  license  fee noted  above.  The Company  expects the gross  margin will
remain at approximately 50% in Fiscal 2002.

Engineering Expense

     Engineering  expenses for Fiscal 2001 declined to $8.2  million,  including
$4.8 million of depreciation, from $11.5 million, which included $4.9 million in
depreciation,  in the prior Fiscal year.  The sale of the assets of the ceramics
facility  account for a  reduction  of  approximately  $1.6  million,  with cost
reduction efforts and facility consolidations accounting for the balance.


Research and Development

     Research and development expenses increased from approximately  $150,000 in
Fiscal 2000 to approximately $550,000 in Fiscal 2001. The Company, in the latter
part of Fiscal 2001,  began to once again  expand its  research and  development
activities in order to expand its line of AuraGen products.  The Company expects
these  expenses  to continue to grow as the  Company  focuses its  attention  in
developing more variations of the basic 5KW AuraGen,  including, but not limited
to, the 6KW, 8.5KW,  10KW,  25KW,  AC/DC versions,  inverter and battery charger
versions, and marine and other applications.

Selling, General and Administrative

     Selling,  general and administrative  expenses were $12.7 million in Fiscal
2001.  The increase in these  expenses  from $10.7 million in the prior year was
primarily a result of an increase in legal costs of approximately  $1.2 million,
and an increase in depreciation and  amortization of approximately  $1.1 million
partially offset by a decrease of $600,000 as a result of the sale of the assets
of the ceramics  facility.  Also  included in the current year expenses is a bad
debt  charge  of $1.3  million  associated  with  non-AuraGen  related  lines of
business we are no longer  engaged in. This compares to bad debts of $163,000 in
the prior Fiscal year. Additionally, in the latter part of Fiscal 2001, we began
to increase our sales staff and other sales and  marketing  expenses.  We expect
these expenses to continue to increase in the future,  but we expect the rate of
increase  in these  expenses to be  substantially  below the rate of increase in
sales.

Other Income and Expense

     In Fiscal 2001, other income and expense  primarily  consisted of a gain of
$1,756,746 recorded on the sale of the assets of the ceramics facility, interest
expense of  $2,263,916  and interest  income of  $432,018.  In Fiscal 2000 other
income and expense  primarily  consisted of $93,638 in net losses on disposal of
assets,  interest  expense of $4,476,690,  interest  income of $357,014 and rent
income of $700,513.


Fiscal 2000 as Compared to Fiscal 1999

Revenues

     Net revenues in Fiscal 2000  declined to $5.8 million from $53.7 million in
Fiscal 1999, a decrease of 89.2%. In Fiscal 1999, net revenues included revenues
of $45.2  million or 84.2% of revenues  from the NewCom  subsidiary  in which we
held an approximate 41% interest at February  28,1999.  NewCom ceased operations
shortly after the end of Fiscal 1999, resulting in no revenue being recorded for
NewCom in Fiscal  2000.  Included  in Fiscal  2000  revenues  are  license  fees
pertaining to sound related patents of $1.5 million or 25.9% of revenues.  There
were no such  revenues in the prior year period.  License fees have a pronounced
effect on the results of operations  since there is little or no cost  involved.
Revenue from the ceramics facility totaled  approximately $2.9 million or 50% of
the revenues for Fiscal 2000, as compared to approximately $2.7 million or 5% of
revenues  in the prior  year  period.  In Fiscal  2000,  net  revenues  from the
Company's  AuraGen  product  totaled   approximately  $.8  million  compared  to
approximately  $1.2  million in Fiscal  1999.  The  decline  was a result of the
Company's financial difficulties and resultant cut back in sales activities.

     Although  inventory  levels are extremely high in relation to sales volume,
the  Company's net inventory is currently  comprised  solely of AuraGen  related
items.  While most of the inventory is  approximately  two years old, there have
been no changes to the product  which would render the inventory  obsolete.  The
Company  fully  expects that with  increasing  sales,  the  inventory  levels in
relation to sales will be drastically reduced.

Cost of Goods

     Cost of goods  decreased to $2.0  million  from $83.3  million in the prior
Fiscal year  primarily as a result of the shutdown of the  Company's  subsidiary
previously  mentioned.  Cost of goods for this subsidiary totaled  approximately
$74.5  million in Fiscal 1999.  After  excluding  the effects of the license fee
noted above the gross  margin was 54% in Fiscal 2000  compared to a negative 55%
in the prior year.

Engineering Expense

     Engineering  expense for Fiscal 2000  declined to $11.5  million from $47.1
million in the prior Fiscal year. The Company's NewCom subsidiary  accounted for
$29.3  million of  engineering  expense in the prior  Fiscal  year.  Other items
contributing  to the decrease were a reduction in rent expense of  approximately
$.3 million,  a reduction in labor and associated  costs of  approximately  $1.2
million,  a reduction in consulting  expenses of approximately $.5 million and a
reduction in general supplies and expense of approximately $.8 million. Included
in engineering expense is $4.9 million in depreciation  compared to $7.2 million
in the prior Fiscal year of which $1.3 million pertained to NewCom.

         In Fiscal 2001,  the Company  reclassified  certain costs that had been
characterized  as overhead costs and included in cost of sales.  These items are
     primarily engineering and facility related and have now been classified as
engineering  expenses in the operating expense  category.  This has been done to
more accurately  reflect the actual cost of the product sold and provide a gross
profit  presentation based on the sale of product itself. This has resulted in a
change in the  reported  gross  margins for Fiscal 1999 and 2000 from a negative
143.1%  and  a  negative  131.9%  to a  negative  55.3%  and a  positive  66.2%,
respectively.


Research and Development

     Research and  development  expense for Fiscal 2000 decreased to $.1 million
from $2.0 million in Fiscal 1999.  This is a result of the Company  focusing its
efforts on marketing and selling the AuraGen.


Selling, General and Administrative

     Selling,  general and administrative expenses decreased to $10.7 million in
Fiscal 2000 from $64.1 million in Fiscal 1999.  The decrease in selling  general
and  administrative  of $53.4 million is primarily related to NewCom expenses of
$38.2  million,  reduction in bad debt expense of $12.8  million,  a decrease in
legal  expenses of $.5 million and a decrease in salary and related items of $.8
million. Additionally, the Company reduced other expenses it was able to control
such as  consolidating  facilities  and  reducing  travel.  Included in selling,
general and administrative expenses for Fiscal 2000 are legal costs and expenses
of   approximately   $1.7  million,   and   depreciation   and  amortization  of
approximately   $950,000.   Bad  debts   included   in   Selling,   general  and
administrative  expenses  decreased to approximately $0.5 million in Fiscal 2000
from $13.3 million in the prior Fiscal year.


Other Income and Expense

     In Fiscal 2000, other income and expense primarily  consisted of $93,638 in
net losses on  disposal  of assets,  interest  expense of  $4,476,690,  interest
income of $357,014 and rent income of $700,513. In Fiscal 1999, other income and
expense  consisted   primarily  of  $5,200,000  in  class  action   settlements,
$6,268,384 in losses recorded from  unconsolidated  joint ventures,  $925,525 in
losses  recorded  on  disposal  of assets,  $4,877,839  in loss on  disposal  of
investment,  $11,679,701  in interest  expense,  and gain on sale of  subsidiary
stock of $992,288.


Discontinued Operations

     Effective  March 1, 1999, the Company sold its MYS group of subsidiaries to
the former  owners of MYS and in June 1999,  the Company  sold the assets of its
AuraSound  division.  Accordingly,  the  results of these  operations  have been
classified as a single item as a discontinued operation.


Fourth Quarter Adjustments

     Certain  events  occurred in the fourth quarter of Fiscal 2000 which impact
the financial statements.  The primary item that occurred was the forgiveness of
debt by certain of the Company's  creditors in the  approximate  amount of $19.1
million.


Liquidity and Capital Resources

     Working  capital was a negative  $5.1  million  compared  to  approximately
$800,000 at Fiscal 2000 year end,  with the current  ratio  declining  to 0.73:1
from  1.05:1.  This  is  primarily  a  result  of  the  reclassification  of the
litigation liability with DFS of $5.5 million to a current liability at February
28, 2001.  This  litigation has been settled  subsequent to year end through the
issuance  of  common  stock  and  payments  to be made  totaling  $350,000.  The
principal  differences  in our accounts  from  February 29, 2000 to February 28,
2001 are an increase in cash and equivalents of $1.0 million,  a decrease in net
receivables  of $1.4 million,  a decrease in  inventories  of $1.4 million and a
decrease  in  accounts  payable and  accrued  expenses  of $1.1  million.  These
decreases  are  primarily  a result of the sale of the  assets  of the  ceramics
facility.

     Included in unsecured  notes payable is an accrued  estimated  liability of
$5,500,000 to Deutsche  Financial Services as a result of a written guarantee of
NewCom  debt.  At February  28,  2001,  this amount is  classified  as a current
liability and is included in Notes Payable on the balance sheet as a result of a
settlement  reached  with DFS  subsequent  to the end of the  Fiscal  year.  The
settlement  called for the  issuance of  10,000,000  shares of Aura common stock
valued at $4,000,000 and the payment of $350,000 in cash.  This  settlement will
result  in a gain on the  settlement  of the  estimated  recorded  liability  of
$1,150,000, which will be recorded in the first quarter of Fiscal 2002.

     The  Company's  cash and  cash  equivalents  balances  were  $1,265,912  at
February 28, 2001, $260,437 at February 29, 2000, and $3,822,210 at February 28,
1999.

     In Fiscal  2001,  we received  net  proceeds of $12.4  million from private
placements.  We also converted $2.9 million of notes payable and $6.1 million of
other  liabilities  into common stock.  In Fiscal 2000 the Company  received net
proceeds of $7.4 million in a private placement and proceeds of $24,800 from the
exercise of warrants.

     In March 2000, the Company sold the assets of its ceramics  facility to the
president of the facility for $3.5  million  resulting in a gain  recognized  of
$1,756,746.  The  terms  of the sale  called  for a note in the  amount  of $2.5
million with interest of 8%, a down payment of $100,000 and a payment at closing
of $100,000 plus payments to third parties of $800,000.

     The net cash used in operating  activities  in Fiscal 2001 of $13.3 million
decreased by $2.2  million from the prior year due  primarily to the decrease in
the gain on extinguishment of debt, which substantially  reduced the net loss in
the prior year, and a lower decrease in accounts  payable and accrued  expenses,
offset partially by a reduced decrease in inventories and other current assets.

     At February 28, 2001, the Company was in violation of its loan covenants on
its line of credit.  The Company  has  received a waiver from the bank for these
violations and fully expects to be able to pay the remaining balance when due in
July 2001.

     Spending  for property  and  equipment  amounted to $38,200 in Fiscal 2001,
$16,103 in Fiscal 2000, and $4,053,848 in Fiscal 1999. Of the Fiscal 1999 amount
$1,910,611  was due to the  manufacture  of tooling and the remainder was due to
the  expansion of facilities  and purchases of equipment  which was necessary in
connection with research and development  activities,  services  performed under
various subcontracts and manufacturing requirements.

     The Company's cash flow generated from operating activities has to date not
been sufficient to fund its working capital needs. Accordingly,  the Company has
relied upon external sources of financing to maintain its liquidity, principally
private and bank indebtedness and equity  financing,  and the sale of assets. No
assurances  can be provided that these funding  sources will be available in the
future,  or at the times and in the amounts  necessary.  The  Company  currently
intends  that  funding  required  for future  growth and  operations  will occur
through a combination of existing working capital, operating profits, and equity
financing.  The Company  expects to satisfy  its  obligations  for the  upcoming
twelve  months  through  the  sale  of  inventory,  collection  of its  accounts
receivable and notes  receivable,  sales of its AuraGen  products and, until the
Company is able to generate  sufficient  cash flow for  operations,  the Company
will be dependent on external sources of funding such as sale of equity,  and or
debt financing.  For long-term obligations,  the Company expects that increasing
sales will  provide  greater  sources  of cash to fund  ongoing  operations  and
additional equity financings will provide any additional  capital required.  The
Company expects that funding for growth, when it is required,  will be generated
from  operations and equity  financings.  The inability of the Company to obtain
sufficient working capital at the times and in the amounts required would have a
material adverse effect on the Company's business and operations.

     Current  fixed  monthly  expenses  corporate  wide,  average  approximately
$950,000, principally for labor, overhead, travel and professional fees.

     The Company leases warehouse space located in Rancho Dominguez, California.
Minimum  monthly  rent under the lease  approximates  $3,900.  Rent  expense was
approximately  $0.1 million for Fiscal 2001,  $0.9 million for Fiscal 2000,  and
$1.8 million for Fiscal 1999.


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

     On August 23, 2000 the Company  received a notice of  resignation  from its
independent  auditors,  Pannell Kerr Forster,  Certified Public  Accountants,  a
Professional  Corporation  ("PKF").  The Company  had been  informed by PKF that
their  decision  was  solely  due to  business  reasons.  Having  served  as the
independent  auditors  of the  Company  since  1992,  PKF  never had nor does it
currently  have any  disagreements  with the Company on any matter of accounting
principles or  practices,  financial  statement  disclosure,  auditing  scope or
procedure  or any  reportable  events.  The  auditors  reports on the  financial
statements for the past eight years during its entire engagement period have not
contained  any  adverse  opinion  or  disclaimer  of  opinion  and have not been
qualified or modified as to  uncertainty,  audit scope or accounting  principles
except for fiscal years 1999 and 2000 when the audit  reports were modified with
a going concern uncertainty.

     PKF fully  cooperated  with the auditor  selection and transition  process,
which was  completed on January 9, 2001 when the firm Singer  Lewak  Greenbaum &
Goldstein LLP was engaged by the Company's Board of Directors.

     Unrelated  to  its   decision  and  pursuant  to  SEC  rules,   under  Item
304(a)(1)(v)(C)(1)(i)  of Regulation S-K, PFK also advised that  information had
come to its attention which, if further investigated,  may materially impact the
fairness or  reliability  of previously  issued audit reports or the  underlying
financial  statements  of Aura Systems Inc. and  Subsidiaries.  The  information
concerning  officer loans which took place in Fiscal 1997 was contained in court
filings of the SEC in regards to the Staff's  response to an SEC  investigation,
reported publicly by the Company in a press release dated January 20, 1999.

     The Company does not believe that the matters referred to above will have a
material  effect on the  Company's  future  financial  condition  or  results of
operations.


<PAGE>


                                    PART III

ITEM 10.        DIRECTORS AND OFFICERS OF THE REGISTRANT

Identification of Directors

     The  following  table sets forth all of the  current  directors,  executive
officers and key employees of Aura, their age, and the office they hold with the
Company.  Executive officers and employees serve at the discretion of the Board.
All directors hold office until the next annual meeting of  stockholders  of the
Company and until their successors have been duly elected and qualified.
<TABLE>
<CAPTION>

                            Director
Name                          Age   Since   Title
---------------------------   ---   -----   -----------------------------------------------------------------------
<S>                            <C>  <C>     <C>
Zvi Kurtzman                   53   1987    Chief Executive Officer, Chairman, Board of Directors
Harvey Cohen                   67   1993    Director, Member of Audit Committee
Salvador Diaz-Verson, Jr.      48   1997    Director, Member of Compensation Committee
Stephen A. Talesnick           51   1999    Vice-Chairman, Board of Directors, Member of Compensation Committee
Norman Reitman                 77   2000    Director, Member of Audit Committee
Harry Haisfield                59   2000    Director, Member of Compensation Committee
Neal Meehan                    59   2000    Director, Member of Audit Committee
William Richbourg              57   2001    Director
</TABLE>

Business Experience of Directors and Nominees During the Past Five Years

     Zvi  Kurtzman  is the CEO and  Chairman  of the Board of  Directors  of the
Company and has served in this capacity since 1987. Mr.  Kurtzman also served as
the Company's  President from 1987 to 1997. Mr.  Kurtzman  obtained his B.S. and
M.S. degrees in physics from California State University, Northridge in 1970 and
1971,  respectively,  and  completed  all  course  requirements  for a Ph.D.  in
theoretical physics at the University of California,  Riverside. He was employed
as a senior scientist with the Science Applications International Corporation, a
scientific  research  company,  in San Diego,  from 1984 to 1985 and with Hughes
Aircraft Company, a scientific and aerospace  company,  from 1983 to 1984. Prior
thereto,  Mr. Kurtzman was a consultant to major defense  subcontractors  in the
areas of computers, automation and engineering.

     In October 1996,  the  Securities  and Exchange  Commission  ("Commission")
issued an order  (Securities Act Release No. 7352) instituting an administrative
proceeding against Aura Systems,  Zvi Kurtzman,  and an Aura former officer. The
proceeding  was  settled on consent of all the  parties,  without  admitting  or
denying any of the  Commission's  findings.  In its order,  the Commission found
that Aura and the others  violated the reporting,  record keeping and anti-fraud
provisions  of the  securities  laws in 1993  and  1994 in  connection  with its
reporting on two  transactions in reports  previously filed with the Commission.
The Commission's  order directs that each party cease and desist from committing
or causing any future  violation of these  provisions.  The  Commission  did not
require Aura to restate any of the  previously  issued  financial  statements or
otherwise amend any of its prior reports filed with the Commission.  Neither Mr.
Kurtzman  nor anyone else  personally  benefited  in any way from these  events.
Also, the Commission did not seek any monetary penalties from Aura, Mr. Kurtzman
or anyone else. For a more complete  description of the Commission's  Order, see
the Commission's release referred to above.

     Harvey  Cohen is a director of the Company and has served in this  capacity
since August 1993. Mr. Cohen is President of Margate  Advisory  Group,  Inc., an
investment advisor registered with the Securities and Exchange Commission, and a
management  consultant  since August  1981.  Mr.  Cohen has  consulted  with the
Company on various  operating and growth strategies since June 1989 and assisted
in the sale of certain of the Company's  securities.  From December 1979 through
July 1981,  he was  President and Chief  Operating  Officer of Silicon  Systems,
Inc., a custom  integrated  circuit  manufacturer  which made its initial public
offering in February 1981 after having  raised $4 million in venture  capital in
1980.  From 1975 until 1979,  Mr. Cohen served as President and Chief  Executive
Officer of International Communication Sciences, Inc., a communications computer
manufacturing  start-up company for which he raised over $7.5 million in venture
capital.  From 1966 through  1975,  Mr. Cohen was  employed by  Scientific  Data
Systems, Inc. ("S.D.S."),  a computer  manufacturing and service company,  which
became Xerox Data Systems,  Inc.  ("X.D.S.")  after its  acquisition by Xerox in
1979. During that time, he held several senior management  positions,  including
Vice  President-Systems  Division of S.D.S.  and Senior Vice  President-Advanced
Systems  Operating of the Business  Planning Group.  Mr. Cohen received his B.S.
(Honors)  in  Electrical  Engineering  in 1955 and an MBA in 1957  from  Harvard
University.

     Hon. 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,  presidentially  appointed by  President  George Bush in
1992, and re-appointed by President Clinton in early 2000.

     Stephen A.  Talesnick is Vice  Chairman of the Board of  Directors  and has
served in this capacity  since  January 2001. He originally  joined the board of
directors in September  1999.  Mr.  Talesnick has owned and maintained a private
law  practice  since 1977,  which is  presently  located in Beverly  Hills.  Mr.
Talesnick  specializes  in business and  financial  transactions  in addition to
entertainment  industry related matters. He originally practiced as an associate
in the New  York  law firm of White & Case.  In  1992,  Mr.  Talesnick  became a
financial advisor in the financial  services industry and is registered with the
Securities and Exchange  Commission.  Mr. Talesnick is a graduate of The Wharton
School of Finance and Commerce at the  University Of  Pennsylvania  and received
his Juris Doctor degree from Columbia University School of Law.

     Norman Reitman is a director of the Company and has served in this capacity
since March 6, 2000.  He  previously  served as a director  of the Company  from
January 1989 to  September  1998.  Mr.  Reitman  obtained  his B.B.A.  degree in
business administration from St. Johns University in 1946 and became licensed as
a public  accountant in New York in 1955. Mr. Reitman is the retired Chairman of
the Board and President of Norman Reitman Co., Inc.,  insurance auditors,  where
he served from 1979 until June 1990.  Mr. Reitman was a senior partner in Norman
Reitman Co., a public  accounting  firm, where he served from 1952 through 1979.
Mr.  Reitman  served  on the  Board of  Directors  and was a Vice  President  of
American Family Life Assurance Co., a publicly held insurance company, from 1966
until April 1991.

     Harry B.  Haisfield  is a director  of the  Company  and has served in this
capacity since October 2000 following  appointment by resolution of the Board of
Directors, pursuant to the Bylaws of the corporation. Since 1982, Mr. Haisfield,
a private investor,  has been involved with start-up companies and has served on
the board of directors of several corporations. He is currently the Chairman and
CEO of Raydak Corporation, which develops non-destructive testing technology. He
has served on the Board of Directors of Achieve.Com, Radiance Communications and
as  a  director  of  First  Pacific  Networks,  a  publicly-held  company.  Upon
completing college, Mr. Haisfield entered the U.S. Naval flight training program
in Pensacola,  Florida,  finishing in the top of his class.  He served more than
five years as an officer and pilot in the U.S. Marines until his release in 1966
at the rank of Captain.  At that time he left the  military to join Pan American
Airlines where he served as an active pilot until 1991.

         Neal  Meehan  is a  director  of the  Company  and has  served  in this
capacity since October 2000 following  appointment by resolution of the Board of
Directors,  pursuant to the Bylaws of the  corporation.  Mr.  Meehan's  business
career  spans  the  transportation  and  telecommunications  sectors,  and he is
currently involved in market development and strategic planning for start-up and
mature  companies.  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 successful career 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 from St. Johns University
in Commercial Science.

         William B.  Richbourg  is a director  of the  Company and has served in
this capacity  since  January  2001.  Mr.  Richbourg,  a trial lawyer,  has been
engaged  in the  private  practice  of law  since  1968.  He has a JD  from  the
University of Florida Law School.  Mr. Richbourg is active in the  environmental
field where he has served as President  and Director of  Environmental  Systems,
Inc., a  privately-held  company involved in the  electro-magnetic  treatment of
water  and as  President  and  Director  of  ECO-21,  a  privately-held  company
specializing  in the marketing and sales of an after-market  emissions  reducing
system for gasoline and diesel engines. As an outstanding football player at the
University of Florida,  he was the  recipient of numerous  academic and athletic
awards.


MANAGEMENT

     Listed below are  Executive  Officers and key  employees of the Company who
are not directors or nominees, their ages, titles and background information.
<TABLE>
<CAPTION>

Name                                Age              Title
---------------------------         ---              --------------------------------------------------------------
<S>                                 <C>              <C>
Gerald S. Papazian                  45               President, Chief Operating Officer
Arthur J. Schwartz, Ph.D.           53               Executive Vice President
Cipora Kurtzman-Lavut               44               Senior Vice President, Corporate Communications
Neal B. Kaufman                     55               Senior Vice President, Management Information Systems
Steven C. Veen                      45               Senior Vice President, Chief Financial Officer
Michael I. Froch                    39               Senior Vice President, General Counsel and Secretary
Jacob Mail                          50               Senior Vice President, AuraGen Operations
DuWayne Menke                       56               Vice President, AuraGen Sales and Marketing
Richard Ulinski                     59               Vice President, Engineering
Keith O. Stuart                     45               Senior Vice President, Applications Development
Ronald J. Goldstein                 59               Senior Vice President, Government/Military Sales
Richard E. Van Allen, Ph.D.         54               Senior Vice President, Industrial and Special Programs
</TABLE>

         Gerald S. Papazian has been the Company's President and Chief Operating
Officer since July 1997. He joined the Company in August 1988 from Bear, Stearns
& Co., an investment-banking  firm, where he served from 1986 as Vice President,
Corporate Finance.  His  responsibilities  there included valuation of companies
for potential financing,  merger or acquisition.  Prior to joining Bear Stearns,
Mr.  Papazian  was an  Associate in the New York law firm of Stroock & Stroock &
Lavan,  where he  specialized  in  general  corporate  and  securities  law with
extensive experience in public offerings. He received a BA, Economics (magna cum
laude) from the University of Southern  California in 1977 and a JD and MBA from
the University of California, Los Angeles in 1981. He served as a trustee of the
University of Southern California from 1994 to 1999

     Arthur J.  Schwartz,  Ph.D.  has been the Executive  Vice  President of the
Company since February 1987. Dr.  Schwartz  obtained his M.S.  degree in physics
from  the  University  of  Chicago  in 1971  and a Ph.D.  in  physics  from  the
University  of  Pittsburgh  in 1978.  Dr.  Schwartz  was employed as a Technical
Director with Science  Applications  International  Corp., a scientific research
company in San Diego,  California  from 1983 to 1984 and was a senior  physicist
with Hughes Aircraft Company, a scientific and aerospace  company,  from 1980 to
1984.  While at Hughes,  he was responsible for advanced studies and development
where he headed a  research  and  development  effort  for new  technologies  to
process optical signals detected by space sensors.  While at Aura, he served for
3 years on a Joint Tri Services  Committee  reporting to the U.S.  Government on
certain technology issues.

     Cipora Kurtzman-Lavut is Senior Vice President,  Corporate  Communications,
and has served in this capacity since  December  1991. She previously  served as
Vice  President in charge of Marketing for the Company since 1988. She graduated
in 1984 from  California  State  University at Northridge  with a B.S. degree in
Business Administration.

     Neal B. Kaufman is Senior Vice President,  Management  Information Systems,
and has served in this  capacity  since 1988.  Mr.  Kaufman  graduated  from the
University  of  California,  Los  Angeles,  in 1967 where he  obtained a B.S. in
engineering.  He  was  employed  as  a  software  project  manager  with  Abacus
Programming  Corp., a software  development firm, from 1975 to 1985. He headed a
team of software  specialists  on the Gas  Centrifuge  Nuclear  Fuel  enrichment
program  for the  United  States  Department  of Energy and  developed  software
related to the Viking and  Mariner  projects  for the  California  Institute  of
Technology Jet Propulsion Laboratory in Pasadena, California.

     Steven C. Veen, a Certified  Public  Accountant,  is Senior Vice President,
Chief  Financial  Officer,  and has served in this capacity since March 1994. He
joined the Company as its Controller in December 1992.  Before that, he had over
12 years experience in varying  capacities in the public accounting  profession.
Mr. Veen served from 1983 to December 1992 with Muller,  King,  Black,  Mathys &
Acker,  Certified  Public  Accountants.  He received a B.A. in  accounting  from
Michigan State University in 1981.

     Michael I. Froch is Senior Vice President, General Counsel and Secretary of
the Company and has served as General  Counsel since March 1997 and as Secretary
since July 1997.  He joined the Company in 1994 as its corporate  counsel.  From
1991 through 1994,  Mr. Froch was engaged in private law practice in California.
Mr.  Froch is admitted to the  California  and  District  of Columbia  bars.  He
received his Juris Doctor  degree from Santa Clara  University  School of Law in
1989, during which time he served as judicial extern to the Honorable Spencer M.
Williams,  United States District Judge for the Northern District of California.
He received his A.B.  degree from the  University  of  California at Berkeley in
1984,  serving from 1982 through 1983 as Staff  Assistant to the  Honorable  Tom
Lantos, Member of Congress.

     Jacob Mail is Senior Vice President,  AuraGen  Operations,  serving in this
capacity  since  November  1999.  Previously he has served as Vice  President of
Operations from 1995 to 1999. Mr. Mail served over 20 years at Israeli  Aircraft
Industries,  starting as a Lead Engineer and progressing to Program Manager.  He
was  responsible  for the  development  and  production of hydraulic  actuation,
steering control  systems,  rotor brake systems and other systems and subsystems
involved in both commercial and military aircraft.  Systems designed by Mr. Mail
are being used today all over the  western  world.  In  addition,  Mr.  Mail has
extensive experience in the preparation of technical specifications planning and
organizing production in accordance with customer specifications at full quality
assurance.

     DuWayne Menke is Vice President of AuraGen Sales and  Marketing.  Mr. Menke
joined Aura in 2000 to manage sales  activities.  He is responsible for building
the  distributor  network  and  coordinating  all  commercial  and  fleet  sales
activities of the company.  He has 30 years of experience in generator sales. He
has 38 years  experience  in sales with over 35 years in the sales of electrical
generation equipment.  He was previously branch manager for Stewart & Stevenson,
one of the largest  distributors of power equipment.  He has served on the board
and as CEO of Power  Services,  Intl.,  which  provided  parts and  services for
vehicle systems.

     Richard Ulinski is Aura's Chief Engineer and Vice President of Engineering.
He has been responsible for all phases of the electronics design for the AuraGen
electronics    including   module    customization,    circuit   board   design,
software-hardware interfaces, test and analysis features both in the company and
for the remote  installer and dealer  specialty  equipment.  Previously he ran a
consulting  service  working  on all  aspects of  digital  and  analog  controls
including 3 years supporting Aura on the AuraGen  program.  Previously he was VP
of Engineering for RJS Inc.  designing bar coders,  scanners and verifiers.  Mr.
Ulinski holds numerous patents in  Electro-optical,  Electro-mechanical  and bar
code related  products.  Mr.  Ulinski  holds an AAS degree in  Electronics  from
Mohawk Valley Community College.

     Keith O. Stuart is Senior Vice President,  Applications Development and has
served in this capacity since  November 1999.  Previously he served as President
of the Company's Tech Center division,  from 1995 to 1999 and has been in charge
of hardware  development  for Aura since 1988. Mr. Stuart  obtained his B.S. and
M.S.  degrees in electrical  engineering  from the  University of California Los
Angeles in 1978 and 1980, respectively. Mr. Stuart worked for Cyphermaster, Inc.
during 1986 and was  employed  by Hughes  Aircraft  Company,  a  scientific  and
aerospace  company,  prior  thereto.  Mr.  Stuart has  designed  and  fabricated
digitally  controlled,  magnetically  supported  gimbals that isolate the seeker
portion of a United States Space  Defense  Initiative  and has also  developed a
multi-computer  automated  test  station  for the  evaluation  of  sophisticated
electro-optical devices.

     Ronald J. Goldstein is Senior Vice  President,  Government/Military  Sales,
serving  in  this  capacity  since  November  1999.  He is  responsible  for the
marketing and sales of AuraGen to worldwide government agencies and the military
and has  served in various  capacities  at Aura  since  1989.  He holds two M.S.
degrees  in  Computing  Technology  and  the  Management  of R & D  from  George
Washington  University  and has  completed  coursework  for a Ph.D.  in  Nuclear
Engineering  from North Carolina  State  University.  Mr.  Goldstein has over 25
years of experience in high  technology  both in government and industry.  Since
1989 Mr.  Goldstein was responsible  for all marketing and business  development
activities   for  the  Company  and  served  since  1995  as  President  of  the
Automotive/Industrial  division  of the  Company.  Prior to  joining  Aura,  Mr.
Goldstein  was  Manager  of Space  Initiatives  at Hughes  Aircraft  Company,  a
scientific  and  research  company,  where he was  responsible  for the  design,
production  and  marketing of a wide variety of aerospace  systems and hardware.
Prior to joining  Hughes in 1982,  Mr.  Goldstein was the Special  Assistant for
National  Programs in the Office of the  Secretary  of Defense,  and before that
held high level program  management  positions  with the Defense  Department and
Central Intelligence Agency.

     Dr. Richard E. Van Allen is Senior Vice  President,  Industrial and Special
Programs,  serving in this capacity since June 1999. He is currently the Program
Manager  for the  military  version  of the  commercial  AuraGen  generator.  In
addition,  Dr. Van Allen manages ongoing  electromagnetic  actuator projects. He
joined the company in 1990 and  previously was Manager and Vice President of the
AuraSound  Division,  and before  that was  Division  manager  of the  Magnetics
Division. In these positions, Dr. Van Allen has been involved in the development
and  manufacture  of virtually  every  electromagnetic  system  produced by Aura
Systems.  Prior  to  joining  Aura,  he was a  Laboratory  Manager  in  Advanced
Government  Programs at the Hughes  Aircraft  Company  Space and  Communications
Group. Before joining Hughes, Dr. Van Allen served as the Navigation Team Leader
for  the  Voyager  outer  planets  exploration  program  at the  Jet  Propulsion
Laboratory.  He  received  his B.S.  degree in  Aeronautical  and  Astronautical
Engineering,  along with an M.S. and Ph.D. in Aerospace Engineering, from Purdue
University.

Family Relationships

     Cipora Kurtzman-Lavut,  Senior Vice President, Corporate Communications, is
the sister of Zvi Kurtzman, who is the Chief Executive Officer and a director of
the Company.  Jacob Mail, Senior Vice President,  AuraGen  Operations is a first
cousin of Cipora Kurtzman-Lavut and Zvi Kurtzman.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the  Securities  and 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 are  required to be  furnished to the Company.  Based solely on its
review of the  copies of such  reports  furnished  to the  Company,  or  written
representations that no reports were required,  the Company believes that during
its fiscal year ended February 28, 2001, all filing  requirements  applicable to
its officers, directors, and ten percent beneficial owners were satisfied except
that Messrs.  Goldstein,  Haisfield,  Mail, Meehan, Menke,  Reitman,  Richbourg,
Stuart, Talesnick,  Ulinski,  Diaz-Verson, and Van Allen failed to timely file a
single Form 5 with one  transaction  acquisition  reported  and  Messrs.  Cohen,
Froch, Kaufman, Kurtzman, Kurtzman-Lavut, Papazian, Schwartz, and Veen failed to
timely file a single Form 5 with two transaction acquisitions reported.  Messrs.
Haisfield, Meehan and Richbourg failed to timely file a single Form 3.

ITEM 11.        EXECUTIVE COMPENSATION

Cash Compensation For Executives

     The following table summarizes all compensation paid to the Company's Chief
Executive Officer, and to the four most highly compensated executive officers of
the Company  other than the Chief  Executive  Officer  whose total  compensation
exceeded $100,000 during the Fiscal year ended February 28, 2001.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                                     Annual                Long Term              All Other
                                                 Compensation(1)Compensation Awards             Compensation(2)
Name and
Principal Position                     Year          Salary             Options/SARs
<S>                    <C>                  <C>           <C>                  <C>                        <C>
  Zvi (Harry) Kurtzman (1)                  2001          $385,000             4,500,000                          $0
  Chief Executive Officer                   2000           386,232                 0
                                            1999           384,290             1,000,000

  Gerald S. Papazian (1)                    2001          $210,000             1,000,000                      $2,029
  President and Chief Operating             2000           217,777                 0
  Officer                                   1999           203,025              100,000

  Arthur J. Schwartz (1)                    2001          $205,000             1,000,000                          $0
  Executive Vice President                  2000           210,192                 0
                                            1999           204,895              500,000

  Steven C. Veen(1)                         2001          $200,000             1,000,000                      $2,100
  Senior Vice President and                 2000           205,469                 0
  Chief Financial Officer                   1999           196,412              100,000

  Cipora Kurtzman-Lavut(1)                  2001          $195,000             1,000,000                          $0
  Senior Vice President                     2000           203,942                 0
                                            1999           199,221              500,000
</TABLE>

(1) The amounts shown are the amounts actually paid to the named officers during
the  respective  fiscal  years.  Because  of the timing of the  payments,  these
amounts do not represent the actual salary accrued by each individual during the
period.  The actual salary rate for these  individuals  which was accrued during
the Fiscal  year  ended  February  2001,  2000 and 1999,  respectively,  were as
follows:  Zvi  Kurtzman - $385,000,  $385,000,  $385,000;  Gerald S.  Papazian -
$210,000, $210,000, $210,000; Arthur J. Schwartz - $205,000, $205,000, $205,000;
Steven C. Veen - $200,000, $200,000, $200,000; Cipora Kurtzman-Lavut - $195,000,
$195,000,  $195,000. Of the compensation paid in Fiscal 2001, $100,427, $53,140,
$50,254,  $35,301,  $38,027 was paid in the form of 315,361,  166,869,  157,807,
110,851, 119,414 shares, respectively, of restricted common stock of the Company
to Mr. Kurtzman,  Mr. Papazian,  Mr. Schwartz,  Mr. Veen and Ms. Kurtzman-Lavut,
respectively.  Of the  compensation  paid in  Fiscal  2000,  $144,561,  $34,781,
$78,201, $44,918 and $58,520 was paid in the form of 535,413,  128,818, 289,632,
166,363,  and 216,742 shares,  respectively,  of restricted  common stock of the
Company,  valued as of the date of grant, to Mr.  Kurtzman,  Mr.  Papazian,  Mr.
Schwartz, Mr. Veen and Ms. Kurtzman-Lavut, respectively. As of February 28, 2001
the restricted shares owned by these persons were valued at $382,848,  $133,059,
$201,348, $124,746 and $151,270,  respectively,  based upon the closing reported
price of the Company's stock on such date.

(2) Such compensation  consisted of total Company contributions made to the plan
account of each individual pursuant to the Company's Employee Retirement Savings
Plan during the Fiscal year ended February 28, 2001.

     No cash  bonuses  or  restricted  stock  awards  were  granted to the above
individuals during the Fiscal years ended February 28, 2001,  February 29, 2000,
and February 28, 1999.  Effective  January 2001, each  non-employee  director is
entitled  to  receive  $20,000  per  year  for  serving  as a  director,  and an
additional $5,000 per year for each director who serves on the audit committee.

     The following table summarizes certain information  regarding option grants
to purchase Common Stock of the Company to the Chief Executive Officer and those
other  executive  officers named in the Summary  Compensation  Table (the "Named
Executive Officers")
<TABLE>
<CAPTION>
                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

                                                                                                Potential
                                                                                           Realizable Value at
                                                                                             Assumed Annual
                                                                                          Rates of Stock Price
                                                                                              Appreciation
                                          Individual Grants                                  For Option Term
----------------------------- ------------------------------------------- ------------- --------------------------
                              Number of       % of
                              Securities      Total
                              Under-          Options/
                              lying           SARs
                              Options/        Granted to     Exercise
                              SARs            Employees      Or Base
                              Granted         In Fiscal      Price         Expiration
Name                          (#)             Year           ($/Sh)        Date           5% ($)       10% ($)
----------------------------- --------------- -------------- ------------ ------------- ----------- --------------
<S>                           <C>                 <C>           <C>          <C>        <C>             <C>
Zvi Harry Kurtzman            4,500,000           25%           0.31         6/7/10     855,000         2,205,000
Gerald Papazian               1,000,000           5.7%          0.31         6/7/10     190,000           490,000
Arthur J. Schwartz            1,000,000           5.7%          0.31         6/7/10     190,000           490,000
Steven C. Veen                1,000,000           5.7%          0.31         6/7/10     190,000           490,000
Cipora Kurtzman Lavut         1,000,000           5.7%          0.31         6/7/10     190,000           490,000
</TABLE>

     The following table summarizes certain information regarding the number and
value of all options to purchase  Common  Stock of the Company held by the Chief
Executive  Officer  and those  other  executive  officers  named in the  Summary
Compensation Table.
<TABLE>
<CAPTION>

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

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

                                  Exercisable         Unexercisable         Exercisable          Unexercisable
<S>                                   <C>                 <C>                 <C>                    <C>
Zvi (Harry) Kurtzman                  720,000             5,100,000           $         0            $  630,000
Gerald S. Papazian                    166,000             1,060,000           $         0            $  140,000
Arthur J. Schwartz                    445,000             1,300,000           $         0            $  140,000
Steven C. Veen                        265,000             1,160,000           $         0            $  140,000
Cipora Kurtzman-Lavut                 445,000             1,300,000           $         0            $  140,000
</TABLE>

*Based on the average high and low reported prices of the Company's Common Stock
on the last day of the fiscal year ended February 28, 2001.

No options were exercised by the above individuals  during the fiscal year ended
February 28, 2001.

     Compensation Committee Report

     The  Company   maintains  a  Compensation   Committee  (the   "Committee"),
consisting entirely of outside,  disinterested,  directors who are not employees
or former employees of the Company.  The Committee  recommends  salary practices
for  executive  officers of the Company,  with all  compensation  determinations
ultimately made by a majority of the outside, disinterested, directors.

     Compensation Philosophy

     The Company's  policy in  compensating  executive  officers is to establish
methods  and levels of  compensation  that will  provide  strong  incentives  to
promote  the  profitability  and  growth  of the  Company  and  reward  superior
performance.  Compensation  of  executive  officers  includes  salary as well as
stock-based programs.  The Board believes that compensation of the Company's key
executives should be sufficient to attract and retain highly qualified personnel
and also provide meaningful incentives for measurably superior performance.  The
Company places special  emphasis on equity-based  compensation,  particularly in
the form of options.  This  approach  also serves to match the  interests of the
executive  officers with the interest of the stockholders.  The Company seeks to
reward  achievement of long and short-term  performance goals which are measured
by a  number  of  factors,  including  improvements  in  revenue  and  achieving
profitability.

     Included  in  the  factors  considered  by the  Committee  in  setting  the
compensation  of the  Company's  Chief  Executive  Officer are the growth in the
Company's  commercial sales, the development of commercial  applications for the
Company's technology, and the effective allocation of capital resources.

     Employment Contracts

     The Company offers  employment  contracts to key executives only when it is
in the best interest of the Company and its  stockholders  to attract and retain
such key  executives  and to ensure  continuity  and  stability  of  management.
Effective as of March 1998, the Company entered into  employment  agreements and
severance agreements with Messrs.  Kurtzman,  Schwartz,  Papazian,  Veen, Froch,
Kaufman,  and Ms.  Kurtzman- and entered into severance  agreements with Messrs.
Goldstein, Mail, and Stuart. The Committee reviewed and approved such agreements
unanimously after consulting with a nationally recognized employee benefits firm
and  determining  that such  agreements were necessary in order to retain highly
qualified  executives whose abilities are critical to the long-term  success and
competitiveness of the Company.

     The  employment  agreements  with  Mr.  Kurtzman  and the  Named  Executive
Officers have an initial term of three years. The term is automatically extended
for  one  year on  each  anniversary  of the  effective  date of the  employment
agreement  unless  either  party  gives  prior  notice  of  termination  of  the
agreement.  Upon the death or disability of these  executives,  their employment
agreements  provide  for a lump sum payment  equal to one year's  salary and the
immediate  vesting  of stock  based  compensation  awards.  In the  event of the
executive's  termination for cause, the terminated executive is entitled only to
compensation  accrued  through  the date of  termination.  If the  executive  is
terminated  by the Company  other than by reason of death,  disability or cause,
the  terminated  executive is entitled to  continued  payment of the base salary
through the end of the stated term together with an annual bonus for each of the
remaining years under the employment agreement equal to the highest annual bonus
amount  received  by the  terminated  executive  in the  three  years  preceding
termination and the immediate vesting of stock based compensation awards.

     Pursuant to severance  agreements entered into effective March 1998 between
the Company and key  executives of the Company,  including Mr.  Kurtzman and the
Named Executive  Officers,  these individuals are entitled to certain additional
benefits,  which become effective at such time as there is a "change in control"
of the Company,  as defined in the  severance  agreements.  If such  executive's
employment is  terminated  following a change in control other than by reason of
death,  disability or by the executive without "good reason",  or if following a
change in control the executive  elects to terminate  his  employment on the one
year  anniversary  following a change in control,  the terminating  executive is
entitled to  specified  severance  payments  in lieu of salary,  bonus and other
compensation  which would otherwise  accrue to the executive upon termination of
the employment agreement.  Specifically,  the severance agreements provide that,
for Messrs.  Kurtzman and Schwartz and Ms. Kurtzman-Lavut,  a lump sum severance
payment  is due upon  termination  in the  amount of three  times the sum of the
terminated  executive's base salary then in effect plus the highest annual bonus
earned in the three years preceding the date of termination;  and in the case of
Messrs.  Veen and Papazian,  1.5 times such base salary and bonus. The severance
agreements  also provide for the  accelerated  vesting of stock based awards and
the  continuation of life and health  insurance  benefits  following the date of
termination   (36  months  for   Messrs.   Kurtzman   and   Schwartz,   and  Ms.
Kurtzman-Lavut, and 18 months for Messrs. Papazian and Veen).

     The Company's senior  management  believes that at some time in the future,
as market  acceptance of the AuraGen  accelerates and  manufacturing  operations
expand,  it may be desirable to replace all or part of the senior members of the
management  team with  individuals  having  focused  experience  in large  scale
manufacturing  and sales  operation.  Accordingly,  in March  2000 Mr.  Kurtzman
proposed to the Board of directors that  consideration be given to restructuring
employment  and  severance  agreements to allow the Company the  flexibility  to
implement an orderly management transition,  if and when deemed advisable by the
Board.

     Subsequently,  the Company's  Board of directors  entered into  discussions
with certain members of senior management with a view towards  restructuring the
employment  and  severance  agreements.  The  Board of  Directors,  through  its
Compensation Committee,  retained independent outside consultants to formulate a
proposal  whereby these  agreements with senior  management would be modified to
allow for the possibility of an orderly  management  transition in the future if
and when deemed advisable by the Board.

     Following  discussions  between  the  Compensation  Committee  of  Board of
Directors and the senior  management  members,  in consultation with independent
consultants, the Compensation Committee proposed that agreements be entered into
whereby the existing employment and severance agreements with Mr. Kurtzman,  the
Named Executive Officers and other key executive officers would be restructured.
Under  the  current  proposal,  which  has  been  approved  unanimously  by  the
Compensation Committee and by a majority of the Board of Directors,  the Company
would have the right to  terminate  these  affected  employees  at will and such
affected  employees would  relinquish  their rights to further  compensation and
severance   payments.   In  exchange  for   relinquishing   their  rights,   the
participating  members would  receive a one-time  payment in stock options at an
exercise  price of $0.55 per share in lieu of receiving cash  compensation.  The
number of stock  options  would be determined  based upon the  underlying  total
compensation due to the employee upon termination under the existing agreements,
multiplied by two and divided by $0.32 per share.

     If and when any management  members  subject to the proposal are terminated
in the Board's  discretion,  such members would thereafter remain as consultants
to the  Company  for a  period  of one year at 85% of their  then  current  base
salaries,  subject to  extension by mutual  agreement.  The  management  members
covered by the proposal have agreed to these terms. However,  there are material
terms which remain to be considered  and agreed to by the Board of Directors and
the affected  members of the management team. There are no assurances that final
agreements will be achieved or when such agreements will be implemented.

     Compensation of Chief Executive Officer and Other Executives

     Pursuant to employment  agreements  entered into effective as of March 1998
the Compensation Committee increased Mr. Kurtzman's base salary in March 1998 to
$385,000,  and increased the base salary of Papazian,  Schwartz and Veen and Ms.
Kurtzman-Lavut  to  $210,000,  $205,000,  $200,000  $195,000,  effective  as  of
December 1997, after consulting with a nationally  recognized  employee benefits
firm.  The increase for Mr.  Kurtzman  reflected  the  Compensation  Committee's
assessment of his performance and Mr. Kurtzman's service to the Company.  Salary
increases for other senior executives effected during 1998 were based on similar
considerations including individual performance,  position,  tenure,  experience
and  compensation  surveys  of  comparable  companies.  Under the terms of their
employment  agreements  the base salary is subject to annual  adjustment,  based
upon the Company's  normal  historical  business  practices and consistent  with
salaries  paid to  executives  performing  similar  functions in the Los Angeles
area.

     Effective in Fiscal 1999,  Mr.  Kurtzman and the Named  Executive  Officers
are,  pursuant to their  employment  agreements with the Company,  entitled to a
discretionary  annual bonus as  determined by the  Compensation  Committee and a
majority of the outside, disinterested,  directors of the Board of Directors. In
determining the amounts of such bonuses,  the Compensation  Committee  considers
the individual performance of each executive and the performance of the Company.
Based  upon  the  Company's   financial   performance  during  Fiscal  2000  the
Compensation  Committee  determined not to award bonuses to Mr.  Kurtzman or the
Named Executive Officers.

     In March 1998, the Committee reviewed and unanimously approved stock option
awards under the Company's stock option plan after  consulting with a nationally
recognized  employee benefits firm. The Committee granted Mr. Kurtzman an option
to purchase  1,000,000 shares of Common Stock, which vest 20% per year over five
years.  The  options  are  exercisable  at $3.31 per share which was 105% of the
market  price  of the  Company's  Common  Stock  on the  date of  grant.  Senior
executives  in the  Company  participate  in  the  stock  option  plan  and  the
Compensation  Committee granted such executives options to purchase Common Stock
during Fiscal 1998. In June 2000 the Compensation Committee unanimously approved
additional  stock  option  awards under the  Company's  stock option plan to Mr.
Kurtzman  and the Named  Executive  Officers,  described  in the table  entitled
"Option/SAR  Grants in the Last Fiscal Year" appearing above. In determining the
number of shares to award to Mr. Kurtzman and other executives, the Compensation
Committee  considered  several factors,  including  primarily Mr. Kurtzman's and
other executives' actual and potential  contributions to the Company's long term
success,  and the size of awards  provided  to other  executives  in  comparable
companies holding similar positions.

     In  July  1997  the  Compensation  Committee  unanimously  recommended  the
re-pricing of stock options granted to key employees, including Mr. Kurtzman and
the Named Executive Officers. The Compensation Committee's re-pricing of options
for  key  employees  was  made  to  those  persons  who  have  made  significant
contributions  to  the  Company's  business,  for  the  purpose  of  maintaining
corporate morale and creating an incentive for continued employment.

     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. However,  pursuant to regulations issued by the
Treasury  Department,  certain  limited  exemptions to Section 162(m) apply with
respect to "qualified  performance-based  compensation" and to compensation paid
in certain  circumstances  by companies in the first few years  following  their
initial  public  offering of stock.  The Company has taken steps to provide that
these exemptions will apply to compensation paid to its executive officers,  and
the Company will continue to monitor the  applicability of Section 162(m) to its
ongoing compensation arrangements. Accordingly, the Company does not expect that
amounts  of  compensation  paid  to  its  executive  officers  will  fail  to be
deductible by reason of Section 162(m).

                                Committee Members

        Salvador Diaz-Verson, Jr., Stephen A. Talesnick, Harry Haisfield


Compensation Committee Interlocks and Insider Participation

     The  Compensation  Committee  for the Fiscal year ended  February  28, 2001
comprised Salvador Diaz-Verson,  Jr., Stephen A. Talesnick, and Harry Haisfield.
Decisions regarding compensation of executive officers for the Fiscal year ended
February 28, 2001 were made unanimously by the outside,  disinterested directors
of the Board of Directors,  after reviewing  recommendations of the Compensation
Committee.


Audit Committee Fraud Detection Program

     In August 1998 a lawsuit  captioned Collins v. Kurtzman et al. was filed in
U.S. District Court in the Central District of California, which purported to be
a derivative  shareholder suit on behalf of Aura against members of the Board of
Directors of the Company.  Aura believes that the action was without  merit.  In
April 1999 a final settlement was entered into by the parties which called for a
dismissal  of  the  action  and  no  payments  by  any  of  the  defendants.  In
consideration  of the plaintiff  dismissing its lawsuit Aura agreed to adopt and
implement a fraud detection  program (the  "Program")  under the auspices of the
Audit Committee,  after consulting with the Company's  outside legal counsel and
independent auditors. The purpose of the Program is to detect and prevent fraud,
maintain  accurate  books and  records  for  financial  transactions,  establish
procedures to ensure the  recording of  transactions  to be in  accordance  with
generally accepted accounting  principles,  and to ensure that the Company's SEC
filings  comply  with  SEC  rules  and  regulations.   The  Audit  Committee  is
responsible for monitoring the Program on an ongoing basis,  with the assistance
of the Company's outside legal counsel and its independent auditors.


<PAGE>


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information  regarding the Company's
Common Stock owned as of May 18, 2001 (i) by each person who is known by Aura to
be the beneficial owner of more than five percent (5%) of its outstanding Common
Stock,  (ii) by each of the  Company's  directors and those  executive  officers
named  in the  Summary  Compensation  Table,  and  (iii)  by all  directors  and
executive officers as a group:
<TABLE>
<CAPTION>

                                                        Shares of                        Percent of
                                                      Common Stock                      Common Stock
Name                                               Beneficially Owned                Beneficially Owned

<S>                                                   <C>         <C>                           <C>
Gardner Lewis Asset Management L.P.                   21,562,736  (17)                          6.6%
ICM Asset Management Inc.                             18,897,864  (16)                          5.8%
James M. Simmons                                      18,897,864  (16)                          5.8%
Arthur Liu                                            22,437,274  (15)                          6.9%
Zvi (Harry) Kurtzman                                   5,256,675  (1)(2)                        1.6%
Arthur J. Schwartz                                     3,065,978  (1)(3)(4)                     1.0%
Cipora Kurtzman Lavut                                  2,357,259  (5)                              *
Harvey Cohen                                             728,287  (6)                              *
Salvador Diaz-Verson, Jr.                              1,456,037  (7)                              *
Stephen A. Talesnick                                   3,087,698  (10)                          1.0%
Gerald S. Papazian                                       964,012  (8)                              *
Steven C. Veen                                         1,223,947  (9)                              *
Norman Reitman                                           717,142  (14)                             *
Harry Haisfield                                        1,556,700  (11)                             *
William Richbourg                                        460,000  (12)                             *
Neal Meehan                                              440,625  (13)                             *

All executive officers and directors                 25,781,355                                  8.0%
    as a group (20 persons)
</TABLE>
--------------------------------
*       Less than 1% of outstanding shares.

(1)  Includes 175,000 shares held of record by Advanced Integrated Systems, Inc.

(2)  Includes  2,420,000  shares  which may be  purchased  pursuant  to  options
     exercisable within 60 days of May 31, 2001.

(3)  Includes  878,333  shares  which  may  be  purchased  pursuant  to  options
     exercisable within 60 days of May 31, 2001.

(4)  Includes  32,000 shares held by Dr. Schwartz as custodian for his children,
     and 74,000 owned by Dr. Schwartz' children, to which Dr. Schwartz disclaims
     any beneficial ownership.

(5)  Includes  878,333  shares  which  may  be  purchased  pursuant  to  options
     exercisable within 60 days of May 31, 2001.

(6)  Includes 31,250 shares  beneficially owned, and 525,000 shares which may be
     purchased pursuant to options within 60 days of May 31, 2001.

(7)  Includes  450,000  shares  which  may  be  purchased  pursuant  to  options
     exercisable within 60 days of May 31, 2001.

(8)  Includes  519,333  shares  which  may  be  purchased  pursuant  to  options
     exercisable within 60 days of May 31, 2001.

(9)  Includes  668,333  shares  which  may  be  purchased  pursuant  to  options
     exercisable  within 60 days of May 31, 2001,  and 20,000 shares held by Mr.
     Veen as  custodian  for his  children,  to which  Mr.  Veen  disclaims  any
     beneficial ownership.

(10) Includes  300,000  shares  which  may  be  purchased  pursuant  to  options
     exercisable within 60 days of May 31, 2001.

(11) Includes  524,000  shares  which may be  purchased  pursuant to options and
     warrants exercisable within 60 days of May 31, 2001.

(12) Includes  250,000  shares  which  may  be  purchased  pursuant  to  options
     exercisable within 60 days of May 31, 2001.

(13) Includes  296,875  shares  which may be  purchased  pursuant to options and
     warrants exercisable within 60 days of May 31, 2001

(14) Includes  475,000  shares  which  may  be  purchased  pursuant  to  options
     exercisable  within 60 days of May 31, 2001 and 12,500  shares owned by Mr.
     Reitman's  wife,  as to which  12,500  shares he disclaims  any  beneficial
     ownership.

(15) Includes  11,833,574 shares held by Alaris,  Inc. which may be deemed to be
     beneficially  owned by Mr. Liu and 4,500,000  shares which may be purchased
     pursuant to warrants exercisable within 60 days of May 31, 2001.

(16) Based upon  information  contained in Schedule 13G/A dated May 16, 2001, as
     filed with the SEC by ICM Asset Management,  Inc. and James M. Simmons. ICM
     Asset  Management,  Inc. is a registered  investment  advisor whose clients
     have the right to receive or the power to direct the  receipt of  dividends
     from, or the proceeds from the sale of, the stock.  James M. Simmons is the
     President  of ICM Asset  Management,  Inc, and is the  beneficial  owner of
     these shares in such  capacity.  Neither of such persons has sole voting or
     sole  dispositive  power  with  respect  to any of  the  18,897,864  shares
     reported as being beneficially owned. Of the 18,897,864 shares beneficially
     owned by these persons,  they have shared dispositive power with respect to
     all of these  shares,  and shared  voting power with respect to  18,025,524
     shares.

(17) Based upon information contained in Schedule 13G/A dated February 13, 2001,
     as  filed  with the SEC by  Gardner  Lewis  Asset  Management  Inc.  Of the
     21,562,736  shares   beneficially   owned  by  this  person,  it  has  sole
     dispositive  power with respect to all of these  shares,  sole voting power
     with respect to 19,508,336  shares, and shared voting power with respect to
     318,100 shares.

     The  mailing  address  for  Gardner  Lewis  Asset  Management,  L.P. is 285
Wilmington - West Chester Pike, Chadds Ford, Pa. 19317.

     The mailing address for ICM Asset  Management,  Inc. is W. 601 Main Avenue,
Suite 600, Spokane, Wa. 99201.

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


ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


December 1998 Private Placement

     In December 1998 the Company  completed a private  placement of Units, each
Unit  consisting  of 10 shares of Common  Stock and  Warrants to  purchase  four
shares of Common  Stock at an exercise  price of $1.00 per share for five years.
The original subscription price was $10.00 per Unit. Of the total gross offering
proceeds of approximately  $1.8 million,  $100,000 was invested by the mother of
Zvi Kurtzman,  and $400,000 was invested by Stephen Talesnick,  who subsequently
became a member of the Board of  Directors  in 1999.  The terms of the  offering
called  for,  among  other  things,  the prompt  registration  of the  purchased
securities  with the SEC. As a result  principally  of delays in completing  the
Company's  audit for the Fiscal year ended February 1999, the Company was unable
to timely file the required  registration.  Consequently  in  amendments  to the
offering  terms which  culminated in March 2000,  the Company agreed to increase
the number of shares  received by each  investor  based upon an agreed  price of
$.33 per share and the  investors  agreed to  surrender  the  Warrants and their
right to receive interest from the Company.


Convertible Note Exchange

     As part of the  Company's  financial  restructuring  in  Fiscal  1999,  the
Company  offered to exchange  convertible  notes issued to investors in 1993 for
Common Stock. As a result of the  restructuring  the Company converted the notes
at a price of $.27 per share. These investors among others included Zvi Kurtzman
and Arthur J.  Schwartz,  whose notes  entitled them to receive from the Company
$100,000  and $80,000,  respectively,  plus  accrued and unpaid  interest.  Both
Messrs.  Kurtzman and Schwartz  exchanged  their notes for Common Stock in March
2000.


<PAGE>


                                     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

       No reports on Form 8-K were filed in the quarter ended February 28, 2001.



<PAGE>


                                INDEX TO EXHIBITS
                            Description of Documents

3.1(11)        Certificate of Incorporation of Registrant as amended.

3.2(1)         Bylaws of Registrant.

10.1(1)        Aura  Systems,  Inc.  1987  Stock  Option  Plan for  Non-Employee
               Directors.

10.2(1)        Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement.

10.3(1)        Deed of Trust and  Assignment of Rents,  dated as of February 27,
               1989,  by the  Registrant  in favor of  Chicago  Title  Insurance
               Company, as Trustee, for the benefit of City National Bank.

10.4(2)        Indenture,  dated as of March 1, 1989, between the Registrant and
               Interwest  Transfer  Co.,  Inc.  as  Trustee,  relating to the 7%
               Secured Convertible Non-Recourse Notes due 1999.

10.5(2)        Form of 7% Secured Convertible Non-Recourse Notes due 1999.

10.6(2)        Deed of Trust, Assignment of Leases and Rents and Fixture Filing,
               dated as of March 1, 1989,  by the  Registrant  in favor of Ticor
               Title Insurance Company, as Trustee, for the benefit of Interwest
               Transfer Co., Inc., as trustee under the Indenture.

10.7(3)        Form of 7% Secured Convertible Non-Recourse Note due 2000.

10.8(4)        1989 Stock Option Plan.

10.9(5)        Joint Development and License  Agreement,  dated August 24, 1992,
               between the Registrant and Daewoo Electronics Co., Ltd.

10.10(6)       Agreement,  dated September 23, 1993,  between the Registrant and
               Burlington Technopole SDN. BHD.

10.11(7)       Dedicated Supplier Agreement, dated December 2, 1993, between the
               Registrant and Daewoo Electronics Co., Ltd.

10.12(8)       Form of 7% Secured Convertible Non-Recourse Note due 2002.

10.13(9)       Agreement  dated  July  19,  1995  between  the  Company  and K&K
               Enterprises.

10.14(9)       Agreement  dated  July  19,  1995  between  the  Company  and K&K
               Enterprises.

10.15(9)       Agreement  dated  July  12,  1995  between  the  Company  and K&K
               Enterprises.

10.16(9)       Agreement  dated  July  12,  1995  between  the  Company  and K&K
               Enterprises.

10.17(9)       Stock  Purchase and Sale  Agreement  dated April 30, 1996 between
               the Company and MYS Corporation

10.18(9)       Joint Venture  Agreement  dated July 26, 1995 between the Company
               and Microbell

10.19(10)      AuraSound Asset Purchase

10.19.1(10)    Asset Purchase  Agreement dated December 1, 1999 among AuraSound,
               Inc., Aura Systems, Inc., AlgoSound, Inc., and

                    Algo Technology, Inc.

10.19.2(10)    Amendment  dated  December 22, 1999 to Asset  Purchase  Agreement
               dated December 1, 1999.

10.19.3(10)    Assignment  and License  Agreement  as of July 15,  1999  between
               Speaker  Acquisition  Sub, Algo  Technology,  Inc., Aura Systems,
               Inc., AuraSound Inc.

10.20(10)      MYS Stock Purchase

10.20.1(10)    Escrow  Agreement  as  of  March  26,  1999  among  the  Company,
               Inc.,Yoshikazu  Masayoshi,  Sadao  Masayoshi,  Sachie  Masayoshi,
               Kazuaki Masayoshi, and Wolf Haldenstein Adler Freeman & Herz LLP.

10.20.2(10)    Promissory Note in the amount of $1,000,000  dated March 26, 1999
               payable to the Company by Yoshikazu  Masayoshi,  Sadao Masayoshi,
               Sachie Masayoshi and Kazuaki Masayoshi.

10.20.3(10)    Promissory Note in the amount of $3,200,000  dated March 26, 1999
               payable to the Company by Yoshikazu  Masayoshi,  Sadao Masayoshi,
               Sachie Masayoshi and Kazuaki Masayoshi.

10.20.4(10)    Stock Purchase Agreement dated March 26, 1999 between the Company
               and Yoshikazu  Masayoshi,  Sadao Masayoshi,  Sachie Masayoshi and
               Kazuaki Masayoshi.

10.21(10)      Agreement with RGC International Investors, LDC

10.21.1(10)    First  Amendment  to Security  Agreement  dated  October 22, 1999
               between RGC International Investors, LDC and the Company.

10.21.2(10)    Settlement  Agreement  and  Complete  Release of all Claims dated
               October 22, 1999 between RGC  International  Investors,  LDC, and
               the Company

10.21.3(10)    Stock Purchase Warrant issued to RGC International Investors, LDC
               by the Company.

10.21.4(10)    Amended  and  Restated  Convertible  Senior  Secured  Note  dated
               October  7,  1998  in the  amount  of  $3,000,000  issued  to RGC
               International Investors, LDC by the Company.

10.22(10)      Settlement  Agreement  and Release of Claims dated as of December
               1, 1999 between JNC Opportunity Fund, Ltd., and the Company.

10.23(10)      Payment  Agreement by and between Credit Managers  Association of
               California and Aura Systems, Inc.

10.24(11)      Release from Infinity  Investors  Limited et al. to Aura Systems,
               Inc.

10.25(11)      Release from Aura Systems,  Inc. to Infinity Investors Limited et
               al.

10.26(11)      Exchange  Agreement  dated as of February 22, 2000,  by and among
               Aura Systems, Inc., Infinity Investors Limited et al.

10.27(11)      Guaranty dated as of February 22, 2000, by Aura Systems, Inc. and
               certain of its subsidiaries.

10.28(11)      Stock Pledge  Agreement  dated as of February  22, 2000,  between
               Aura Systems, Inc. and HW Partners, L.P. as agent.

10.29(11)      Security  Agreement  dated as of February 22, 2000,  between Aura
               Systems,  Inc., certain subsidiaries of Aura Systems, Inc. and HW
               Partners L.P.

10.30(11)      Secured Note dated February 22, 2000, from Aura Systems,  Inc. to
               Infinity Investors Limited.

10.31(11)      Secured Note dated February 22, 2000, from Aura Systems,  Inc. to
               Global Growth Limited.

10.32(11)      Secured Note dated February 22, 2000, from Aura Systems,  Inc. to
               Summit Capital Limited.

10.33(11)      General  Assignment  and Bill of Sale dated  February  29,  2000,
               between Alpha Ceramics, Inc. and Aura Ceramics, Inc.

10.34(11)      Assignment  and Assumption of Specified  Liabilities  dated as of
               May 3,  2000,  by and  between  Alpha  Ceramics,  Inc.  and  Aura
               Ceramics, Inc.

10.35(11)      Assignment  and  Assumption  of Lease dated as of May 3, 2000, by
               and between Alpha Ceramics, Inc. and Aura Ceramics, Inc.

10.36(11)      Revolving Credit and Term Loan Agreement dated as of May 2000, by
               and between Alpha Ceramics, Inc. and Excel Bank.

10.37(11)      Asset Purchase  Agreement dated February 29, 2000,  between Alpha
               Ceramics, Inc. and Aura Ceramics, Inc.

10.38(11)      Subordination  Agreement  dated as of May 2000, by Aura Ceramics,
               Inc. and Aura Systems, Inc.

10.39(11)      Escrow  Agreement  dated  March 6,  2000,  by and  among  Guzik &
               Associates, Aura Systems, Inc. and Isosceles Fund Limited.

10.40(11)      Subscription  Agreement  from  Isosceles  Fund  Limited  to  Aura
               Systems, Inc.

10.41(11)      Stock Purchase Warrant of Aura Systems,  Inc. issued to Isosceles
               Fund Limited.

10.42(11)      Settlement  Agreement  and Release of Claims dated as of March 6,
               2000, between Aura Systems, Inc. and Isosceles Fund Limited.

10.43(12)      Settlement  Agreement  and Mutual  Release  dated as of March 12,
               2001,  between Aura Systems,  Inc. and Deutche Financial Services
               Corporation.

21.(12)        Subsidiaries of Aura Systems, Inc.

23.1           Consent of Pannel Kerr Forster

23.2           Consent of Singer Lewak Greenbaum & Goldstein LLP.

(1)            Incorporated  by  reference  to the  Exhibits  to  the  Company's
               Statement on Form S-1 (File No. 33-19531).

(2)            Incorporated  by  reference  to the  Exhibits  in  the  Company's
               Current  Report  on Form 8-K  dated  March  24,  1989  (File  No.
               0-17249).

(3)            Incorporated  by  reference  to the  Exhibits  to  Post-Effective
               Amendment No. 2 to the Company's  Registration  Statement on Form
               S-1 (File No. 33-27164).

(4)            Incorporated  by  reference  to the  Exhibits  to  the  Company's
               Statement on Form S-8 (File No. 33-32993).

(5)            Incorporated  by  reference  to  the  Exhibit  to  the  Company's
               Statement on Form S-1 (File No. 35-57 454).

(6)            Incorporated by reference to the Company's Current Report in Form
               10-Q dated November 30, 1993.

(7)            Incorporated  by  reference  to the  Exhibits  to  the  Company's
               Registration Statement on Form S-1 (File No.-33-57454).

(8)            Incorporated by reference to the Exhibits to the Company's Annual
               Report  Form 10-K for the fiscal  year ended  February  28,  1994
               (File No. 0-17249).

(9)            Incorporated  by reference to the  Company's  Annual  Report Form
               10-K for the  fiscal  year  ended  February  29,  1996  (File No.
               0-17249).

(10)           Incorporated by reference to the Company's  Annual Report on Form
               10-K for the  Fiscal  year  ended  February  28,  1999  (File No.
               0-17249).

(11)           Incorporated by reference to the Company's  Annual Report on Form
               10-K for the  Fiscal  year  ended  February  29,  2000  (File No.
               0-17249).
(12)           Incorporated by reference to  the  Company's Annual Rport on Form
               10-K for  the  Fiscal  year  ended  February  28, 2001 (File No.
               0-17249).

<PAGE>


     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 13, 2001
                                     By:      /s/   Zvi Kurtzman
                                        --------------------------------
                                              Zvi Kurtzman
                                              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.
<TABLE>
<CAPTION>

Signatures                                              Title                                     Date


<S>                                      <C>                                                    <C>
/s/Zvi Kurtzman                          Chief Executive Officer and Director                    August 13, 2001
---------------------------------
Zvi Kurtzman                             (Principal Executive Officer)

/s/Steven C. Veen                        Senior Vice President,                                  August 13, 2001
---------------------------------
Steven C. Veen                           Chief Financial Officer
                                         (Principal Financial and Accounting Officer)

/s/ Harvey Cohen                         Director                                                August 13, 2001
---------------------------------
Harvey Cohen

/s/Salvador Diaz-Verson, Jr.             Director                                                August 13, 2001
---------------------------------
Salvador Diaz-Verson, Jr.

/s/Harry Haisfield                       Director                                                August 13, 2001
---------------------------------
Harry Haisfield

/s/Neal Meehan                           Director                                                August 13, 2001
---------------------------------
Neal Meehan

/s/Norman Reitman                        Director                                                August 13, 2001
---------------------------------
Norman Reitman

/s/William Richbourg                     Director                                                August 13, 2001
---------------------------------
William Richbourg

/s/ Stephen A. Talesnick                 Director                                                August 13, 2001
---------------------------------
Stephen A. Talesnick

                                         Director                                                August 13, 2001
---------------------------------
Carl A. Albert
</TABLE>


                               AURA SYSTEMS, INC.
                                AND SUBSIDIARIES


                   Index to Consolidated Financial Statements



<TABLE>
<CAPTION>

<S>                                                                                                        <C>
    Independent Auditors' Report on Consolidated Financial Statements and
           Financial Statement Schedule                                                                       F-2 to F-3
    Consolidated Financial Statements of Aura Systems, Inc. and Subsidiaries:
    Consolidated Balance Sheets-February 28, 2001 and February 29, 2000                                       F-4 to F-5
    Consolidated Statements of Operations and Comprehensive Loss-
            Years ended  February 28,  2001,  February 29, 2000 and February 28,
    1999 F-6 Consolidated  Statements of  Stockholders'  Equity (Deficit) -Years
    ended
           February  28,  2001,  February  29,  2000 and  February  28, 1999 F-7
    Consolidated Statements of Cash Flows-Years ended February 28, 2001,
           February 29, 2000 and February 28, 1999                                                            F-8 to F-10

   Notes to Consolidated Financial Statements                                                                F-11 to F-24

   Consolidated Financial Statement Schedule:
      II      Valuation and Qualifying Accounts                                                                  F-25

   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.
</TABLE>



<PAGE>




                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Aura Systems, Inc.
El Segundo, California

We have audited the  accompanying  consolidated  balance  sheet of Aura Systems,
Inc. and  subsidiaries  as of February 28,  2001,  and the related  consolidated
statements of operations and comprehensive loss,  stockholders' equity, and cash
flows for the year then ended,  and the  related  financial  statement  schedule
listed  in the  accompanying  Index at Item  14.  These  consolidated  financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audit.

We conducted our audit in accordance with generally  accepted auditing standards
in the  United  States of  America.  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  audit  provides  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 28, 2001, and the results of their  operations
and their  cash  flows  for the year then  ended,  and the  financial  statement
schedule  presents fairly, in all material  respects,  the information set forth
therein,  in conformity  with generally  accepted  accounting  principles in the
United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  note 1 to the
consolidated financial statements,  the Company has generated significant losses
from operations and is involved with significant litigation.  As the Company has
suffered  recurring  losses  from  operations,  is  in  violation  of  its  loan
covenants,  and is the subject of certain  lawsuits,  there is substantial doubt
about its ability to continue as a going concern.  Management's  plans in regard
to these matters are also  described in note 1. The financial  statements do not
include any adjustments that might result from the outcome of this uncertainty.



/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
April 12, 2001




<PAGE>



                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
   Aura Systems, Inc.
El Segundo, California


We have  audited  the  consolidated  balance  sheet of Aura  Systems,  Inc.  and
subsidiaries as of February 29, 2000 and the related consolidated  statements of
operations and comprehensive  loss,  stockholders'  equity  (deficit),  and cash
flows for each of the two years in the period  ended  February  29, 2000 and the
related financial  statement  schedule listed in the accompanying  Index at Item
14. These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated  financial  statements and financial  statement
schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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, 2000 and the results of their operations and
their  cash  flows for each of the two years in the period  ended  February  29,
2000, and the financial  statement  schedule  presents  fairly,  in all material
respects,  the information  set forth therein,  all in conformity with generally
accepted accounting principles.

The accompanying  financial statements have been prepared assuming Aura Systems,
Inc.  will  continue  as a  going  concern.  As  discussed  in  note  1  to  the
consolidated financial statements,  the Company has generated significant losses
from operations.  As the Company has suffered  recurring losses from operations,
there is  substantial  doubt about its  ability to continue as a going  concern.
Management's  plans in  regard to these  matters  are  described  in note 1. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.




/s/ Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation

Los Angeles, California  90017
June 12, 2000



<PAGE>

<TABLE>
<CAPTION>

                               AURA SYSTEMS, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                                                                        February 28,          February 29,
                                                                             2001               2000
                                                                            -----              -------
ASSETS
<S>                                                             <C>                     <C>
CURRENT ASSETS:
   Cash and equivalents                                            $    1,265,912        $      260,437
   Receivables, net                                                     1,062,041             2,459,200
   Inventories, net                                                     9,756,399            11,189,227
   Other current assets                                                   452,940               360,117
   Note receivable                                                      1,405,857             3,557,067
                                                                    -------------         -------------

         Total current assets                                          13,943,149            17,826,048
                                                                    -------------         -------------

PROPERTY AND EQUIPMENT, AT COST                                        41,289,011            42,219,417
   Less accumulated depreciation and amortization                     (20,966,852)          (15,184,362)
                                                                      ------------        --------------
         Net property and equipment                                    20,322,159            27,035,055

LONG-TERM Investments                                                   1,883,835             2,123,835
long-term receivables                                                   2,516,139             1,250,000
Patents and trademarks-Net                                              3,370,263             4,615,769
OTHER ASSETS                                                            3,242,498             3,271,831
                                                                    -------------         -------------
         Total                                                     $   45,278,043        $   56,122,538
                                                                    =============         =============

</TABLE>











          See accompanying notes to consolidated financial statements.

<PAGE>


<TABLE>
<CAPTION>

                               AURA SYSTEMS, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                                                                       February 28,          February 29,
LIABILITIES AND STOCKHOLDERS' EQUITY                                         2001                2000
                                                                       --------------         -------
CURRENT LIABILITIES:
<S>                                                                    <C>                   <C>
   Notes payable                                                       $   14,300,594        $    9,899,531
   Convertible note, unsecured                                                     --             1,250,000
   Accounts payable                                                         3,463,146             4,216,004
   Accrued expenses and other                                               1,284,754             1,634,300
                                                                        -------------         -------------
         Total current liabilities                                         19,048,494            16,999,835
                                                                        -------------         -------------
                                                                           24,184,514            37,606,695
                                                                        -------------         -------------
NOTES PAYABLE AND OTHER LIABILITIES

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
   Common stock par value $.005 per share and additional paid in
   capital. Issued and outstanding 291,089,582 and 196,975,392            264,787,864           234,196,092
   shares respectively.
   Common Stock not issued                                                         --             9,132,774
   Accumulated deficit                                                   (262,742,829)         (241,812,858)
                                                                          -----------         --------------

         Total stockholders' equity                                         2,045,035             1,516,008
                                                                        -------------         -------------
         Total                                                         $   45,278,043        $   56,122,538
                                                                        =============         =============
</TABLE>










          See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

                       AURA SYSTEMS, INC AND SUBSIDIARIES
                    Consolidated Statements of Operations and
                Comprehensive Loss Years ended February 28, 2001,
                     February 29, 2000 and February 28, 1999

                                                               2001                 2000                  1999
                                                           -------------         -------------         -------
<S>                                                        <C>                   <C>                   <C>
Net Revenues FROM SALE OF PRODUCT                          $   2,512,508         $   4,288,221         $  53,650,025
pATENT ASSIGNMENT FEES                                                --             1,500,000                    --
                                                           -------------         -------------         -------------
TOTAL NET REVENUES                                             2,512,508             5,788,221            53,650,025
                                                           -------------         -------------         -------------
Cost of GOODS                                                  1,216,637             1,957,854            83,344,562
                                                           -------------         -------------         -------------

GROSS PROFIT (LOSS)                                            1,295,871             3,830,367           (29,694,537)
                                                           -------------         -------------         --------------

OPERATING EXPENSES:
   Engineering expenses                                        8,214,981            11,466,449            47,092,632
   Research and development                                      547,812               148,443             1,996,198
   Impairment of long-lived assets                               240,000                    --             5,838,466
   Selling, general and administrative expenses               12,695,833            10,725,397            64,131,074
   Legal settlements                                           1,512,769               427,091             2,517,518
   Settlement on accounts payable                             (1,046,324)            2,350,671                    --
                                                           --------------        -------------         -------------
         Total operating expenses                             22,165,071            25,118,051           121,575,888
                                                           -------------         -------------         -------------

LOSS FROM OPERATIONS                                         (20,869,200)          (21,287,684)         (151,270,425)

OTHER INCOME AND (EXPENSE)                                       (60,771)           (3,115,687)          (28,044,528)
LOSS BEFORE INCOME TAXES AND OTHER ITEMS
                                                             (20,929,971)          (24,403,371)         (179,314,953)
   Provision for taxes                                                --                    --               566,635
   Minority interests in consolidated subsidiary                      --                    --            10,372,895
   Loss in excess of basis of subsidiary:
     Aura Systems, Inc.                                               --                    --             8,080,695
     Minority interests                                               --                    --            26,561,481
                                                          --------------        --------------        --------------
Loss from continuing operations                              (20,929,971)          (24,403,371)         (134,866,517)
                                                          ---------------       ---------------       ---------------
Discontinued Operations:
     Loss from Discontinued Operations, Net of
     taxes of $0 for 2000 and 1999 respectively                       --            (1,433,859)          (14,875,065)
     Loss on Disposal, Net of Taxes of $0 for 2000                    --            (3,063,574)                   --
                                                          --------------        ---------------       --------------
Loss from Discontinued Operations                                     --            (4,497,433)          (14,875,065)
                                                          --------------        ---------------       ---------------
Loss before extraordinary item                               (20,929,971)          (28,900,804)         (149,741,582)
Extraordinary Item
     Gain on extinguishment of debt obligations,  net
     of income taxes of $0                                            --            19,068,916                    --
                                                          --------------        --------------        --------------
Net loss                                                     (20,929,971)           (9,831,888)         (149,741,582)

Other comprehensive income (loss), net of taxes:                      --               365,932              (406,574)
                                                          --------------        --------------        ---------------
Comprehensive loss                                        $  (20,929,971)       $   (9,465,956)       $ (150,148,156)
                                                           --------------        ==============       ===============

NET LOSS PER COMMON SHARE                                 $        (0.08)       $        (0.08)       $        (1.74)
                                                           ==============        ==============       ===============
Loss from continuing operations per common share          $        (0.08)       $        (0.20)       $        (1.57)
                                                           =============         ==============        ==============
Loss from discontinued operations per common share
                                                          $            --       $        (0.03)       $        (0.17)
                                                           ==============        =============         ==============
Extraordinary income per common share                     $            --       $         0.15        $           --
                                                           ==============        =============         =============

WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES                                              261,568,346          124,294,051             85,831,688
                                                              ===========          ===========          =============
</TABLE>
          See accompanying notes to consolidated financial statements.


<PAGE>


                               AURA SYSTEMS, INC.
                                AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

     Years ended February 28, 2001, February 29, 2000 and February 28, 1999

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                                                          Other
                                       Common Stock          Additional     Common                    Comprehensive
                                       ------------
                                                               Paid-in    Stock not    Accumulated    (CTA) Income
                                                                      -            -              -
                                    Shares        Amount      Capital       Issued       Deficit          (Loss)        Total
                                    ------        ------      -------       ------       -------     -    ------        -----

<S>                  <C>            <C>         <C>         <C>           <C>          <C>                <C>        <C>
Balances at February 28, 1998       80,001,244  $400,006    $198,700,608  $      --    $ (82,239,388)     $40,642    $116,901,868

Notes payable converted             16,513,282    82,566      10,126,867         --               --           --      10,209,433
Exercise of warrants                 7,475,383    37,377       7,971,198         --               --           --       8,008,575
Exercise of stock options               50,000       250         102,750         --               --           --         103,000
Stock issued to acquire assets         114,833       574          28,134         --               --           --          28,708
Private placements                   3,597,300    17,986       1,779,656         --               --           --       1,797,642
Expenses of issuances                       --        --       (554,727)         --               --           --        (554,727)
Other comprehensive income(CTA)             --        --              --         --               --     (406,574)       (406,574)
Net (loss)                                  --        --              --         --     (149,741,582)          --    (149,741,582)
                                   -----------  --------    ------------  ---------     ------------ ------------    ------------

Balances at February 28, 1999      107,752,042   538,759     218,154,486         --     (231,980,970)    (365,932)
                                                                                                                     (13,653,657)

Notes payable converted             68,534,445   342,672      10,036,430         --               --           --      10,379,102
Exercise of warrants                   120,000       600          44,200         --               --           --          44,800
Stock    issued   to    satisfy      2,907,275    14,536         770,429         --               --           --         784,965
    liabilities
Private placements                  17,661,630    88,308       4,400,692         --               --           --       4,489,000
Expenses of issuances                       --        --       (195,020)         --               --           --        (195,020)
Common stock not issued                     --        --          --      9,132,774               --           --       9,132,774
 Other   comprehensive    income            --        --          --            --                --      365,932         365,932
(CTA)
Net (loss)                                  --        --              --         --       (9,831,888)          --      (9,831,888)
                                --------------  --------    ------------  ---------   ---------------    --------    -------------

Balances at February 29, 2000      196,975,392   984,875     233,211,217   9,132,774    (241,812,858)          --       1,516,008

Notes payable converted              7,324,191    36,621       2,912,744         --               --             --     2,949,365
Stock    issued   to    satisfy     11,642,627    58,160       6,093,135         --               --             --     6,151,295
    liabilities
Private placements                  40,721,909   203,610      12,231,830         --               --             --     12,435,440
Stock issued for prior year         34,425,463   172,128       8,960,646  (9,132,774)             --             --            --
Expenses of issuances                       --        --        (77,102)         --               --             --        (77,102)
Net (loss)                                  --        --              --         --      (20,929,971)            --    (20,929,971)
                                   -----------  --------     -----------   --------     ---------------------------     ------------

Balance at February 28, 2001       291,089,582  $1,455,394   $263,332,470  $     --     $(262,742,829$                  $2,045,035
                                   ===========  ==========    =========== =========     ============================    ==========
                                                                                                     --
</TABLE>












          See accompanying notes to consolidated financial statements.


<PAGE>


<TABLE>
<CAPTION>
                               AURA SYSTEMS, INC.
                                AND SUBSIDIARIES


                      Consolidated Statements of Cash Flows
              Years ended February 28, 2001, February 29, 2000 and
                                February 28, 1999


                                                                           2001               2000              1999
                                                                           ----               ----              ----
Cash flows from operating activities:
<S>                                                                   <C>                <C>              <C>
    Net loss                                                          $(20,929,971)      $ (9,465,956)     $(149,741,582)
                                                                       -----------       -------------    --------------
    Adjustments to reconcile net loss to net
        cash used by operating activities:
    Depreciation and amortization                                        7,619,979          6,853,924         12,985,278
    Provision for environmental cleanup                                         --             48,812             44,516
    (Gain) loss on disposition of assets                                (1,756,746)            93,638            925,525
    Equity in losses of unconsolidated joint ventures                           --                 --          6,268,384
    Impairment of long-lived assets                                        240,000                 --          9,403,687
    Gain on extinguishment of debt                                              --        (19,068,916)                --
    Long term assets charged to operations                                      --                 --          1,425,794
    Settlement on accounts payable                                      (1,046,324)                --                 --
    Minority interest in earnings (loss) of subsidiary                          --                 --        (10,372,895)
    Operating expenses satisfied with stock                                903,935                 --                 --
    Loss on disposal of investments                                             --                 --          4,877,839
    Loss on disposal of discontinued operations                                 --          2,697,642                 --
    Assets-(Increase) Decrease:
     Receivables                                                         1,397,159            462,541         46,037,727
     Inventories                                                         1,432,828          4,019,810         40,236,817
     Prepayments                                                                --                 --          9,891,144
     Other current assets                                                  (92,763)         1,515,787          3,801,107
     Deferred income taxes                                                      --                 --            838,000
    Liabilities-Increase (Decrease):
     Accounts payable                                                     (752,858)        (1,371,174)       (21,479,522)
     Accrued expenses                                                     (349,546)        (1,577,248)         4,614,005
     Litigation and other liabilities                                           --            222,223          7,389,649
                                                                      ------------     --------------       ------------
    Total adjustments                                                    7,595,664         (6,102,961)       116,887,055
                                                                         ---------     ---------------      -----------
         Net cash used by operating activities                         (13,334,307)       (15,568,917)       (32,854,527)
                                                                      -------------    ---------------      ------------
Cash flows from investing activities:
   Payments from notes receivable                                        3,784,681          5,674,828                 --
   Proceeds from sale of assets                                                 --            327,109          2,721,000
   Purchase of property and equipment                                      (38,200)           (16,103)        (2,143,237)
   Manufacture of special tools and equipment                                   --                 --         (1,910,611)
   Investment in joint ventures                                                 --                 --           (164,466)
   Long-term investments                                                        --                 --         (4,940,000)
   Long-term receivables                                                        --                 --          3,436,809
   Patents and trademarks                                                       --                 --           (467,167)
   Other assets                                                              3,821                 --                 --
   Proceeds from subsidiary stock                                               --                 --          1,611,873
                                                                       -----------     --------------        -----------
         Net cash provided (used) by investing activities                3,750,302          5,985,834         (1,855,799)
                                                                       -----------     --------------        ------------
</TABLE>



           See accompanying notes to consolidated financial statements


<PAGE>

<TABLE>
<CAPTION>

                               AURA SYSTEMS, INC.
                                AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                                                          2001               2000              1999
                                                                          ----               ----              ----
     Cash flows from financing activities:
<S>                                                                   <C>                 <C>             <C>
        Net proceeds from borrowings                                  $        --           $251,101        $17,922,584
        Repayment of notes payable                                     (1,768,859)        (1,218,571)        (3,396,083)
        Proceeds from exercise of options                                      --                 --            103,000
        Net proceeds from issuance of common stock                     12,358,339          7,393,980          1,675,873
        Net proceeds from exercise of warrants                                 --             24,800          7,884,325
        Net proceeds from issuance of convertible notes                        --                 --         11,720,000
        Repayment of convertible notes                                         --           (430,000)        (3,050,000)
                                                                      -----------        ------------        -----------
            Net cash provided by financing activities                  10,589,480          6,021,310         32,859,699
                                                                     ------------       ------------       ------------
            Effect of exchange rate changes on cash                            --                 --           (406,574)
                                                                      -----------        -----------       -------------
              Net increase (decrease) in cash and equivalents           1,005,475         (3,561,773)        (2,257,201)
     Cash and equivalents at beginning of year                            260,437          3,822,210          6,079,411
                                                                     ------------       ------------       ------------
     Cash and equivalents at end of year                             $  1,265,912     $      260,437       $  3,822,210
                                                                      ===========       ============        ===========
     Supplemental disclosures of cash flow information:
        Cash paid during the year for:
          Interest                                                   $  1,977,239       $    922,708       $  3,374,992
                                                                      ===========        ===========       ============
          Income Taxes                                               $         --       $         --       $  2,244,762
                                                                      ===========        ===========       ============
</TABLE>
     Supplemental disclosures of non-cash investing and financing activities:

During the year ended February 28, 2001, $2,949,365 of notes payable and accrued
interest were converted into 7,324,191  shares of common stock. The Company also
issued  11,642,627  shares of common  stock in  satisfaction  of  $6,151,295  of
liabilities  of which  $3,748,384  was long term  trade debt  included  in notes
payable and other  liabilities.  During the year ended  February 28,  2001,  the
Company also issued the following  shares of common stock which were recorded as
a component of  stockholder's  equity  (common stock not issued) at February 29,
2000.  The common stock could not be issued in Fiscal 2000 due to the limitation
on the number of shares  authorized.  The  Company  issued  2,520,000  shares of
common  stock for the  conversion  of notes  payable  and  accrued  interest  of
$686,524;  541,667  shares of common stock in  settlement  of accrued and unpaid
director's fees of $146,250; 12,500,000 shares of common stock, in the amount of
$3,100,000 for the Company's private placement,  and 14,687,972 shares of common
stock with a value of  $5,200,000  to satisfy the  liability  for a class action
settlement.  In  addition,  2,400,000  shares of common  stock were  issued as a
finder's fee for the Company's private placements and 1,775,824 shares of common
stock for repricing a prior private  placement of the Company.  The finder's fee
and repricing had no effect on total stockholders' equity. The above items total
34,425,463  shares  and  $9,132,774,  which  is  included  in  the  Consolidated
Statement  of  Stockholders'  Equity as Common Stock not issued for Fiscal 2000,
and  Common  Stock in Fiscal  2001.  During the year ended  February  29,  2000,
$11,009,102 of convertible notes were converted into 71,054,445 shares of common
stock.  Of the  preceding  amounts,  $630,000  of  convertible  notes which were
tendered for conversion  into 2,520,000  shares of common stock,  is included in
the  line  item  Common  stock  not  issued  in the  Consolidated  Statement  of
Stockholders' Equity. Additionally, liabilities of $20,000 were satisfied by the
exercise  of 40,000  warrants  with an  exercise  price of $.50 per  share,  and
1,020,890  shares of stock were  issued as fees in  connection  with the private
placement.  The Company issued 2,907,275 shares of common stock in settlement of
accrued and unpaid management compensation of $784,965. Included in net proceeds
from  issuance of common  stock in the  consolidated  statement of cash flows is
$3.1  million  which is included in the line item Common stock not issued in the
Consolidated Statement of Stockholders' Equity. At the start of Fiscal 2000, the
Company had  $38,481,782  in convertible  notes  payable,  of which most were in
default.   During  the  current  year  the  Company  restructured  much  of  its
convertible  notes  payable  obligation  through  debt  forgiveness  and  equity
conversion.  With the debt  restructure,  $11,009,102 of  convertible  notes was
converted  into  71,054,445  shares  of the  Company's  common  stock,  of which
2,520,000  shares are not reflected as  outstanding as of February 29, 2000. The
Company  also  redeemed  $430,000  of  convertible  notes,  and  $12,535,898  in
convertible notes and $5,850,168 in accrued interest were forgiven.  The balance
of these notes became non  convertible and are included in secured notes payable
for the year ended  February 29, 2000, as detailed in Footnote 10. A majority of
the  restructure  was   accomplished  by  a  single  unrelated  party  acquiring
$21,345,000  of  the  convertible  notes  payable  and  subsequently  converting
$9,224,102  into  65,034,445  shares  of the  Company's  common  stock  and debt
forgiveness  of  $12,120,898.  In  addition,  $682,852 in  accounts  payable and
accrued  expenses was also  forgiven.  Total debt  forgiveness of $19,068,918 is
reflected as an extraordinary  item in the accompanying  consolidated  financial
statements and resulted in extraordinary income per share of $0.15.

During the year ended February 28, 1999,  $10,209,433  of convertible  notes and
accrued  interest  were  converted  into  16,513,282  shares  of  common  stock.
Additionally,  90,510  shares of common stock were issued for services  received
totaling $90,510.  During the year ended February 28, 1999,  2,000,000 shares of
the Company's investment in NewCom Inc., valued at $2,820,000,  were surrendered
to a NewCom  creditor  pursuant to a security  agreement that  collateralized  a
NewCom  note  in the  amount  of  $1,000,000.  The  Company  recorded  a loss of
$1,820,000 as a result of this transaction in Fiscal 1999.

During the year ended  February  28,  2001,  the Company  sold the assets of the
ceramics  facility  for $3.5  million in the form of a note  receivable  of $2.5
million plus $800,000 paid to third parties in  satisfaction  of liabilities and
payments of $200,000  to Aura.  During the year ended  February  29,  2000,  the
Company sold its MYS subsidiary  for a total of $4.2 million  consisting of a $1
million down payment and a note  receivable  of $3.2  million.  The Company also
sold the assets of its  AuraSound  subsidiary  for  approximately  $2.4  million
consisting of a down payment of $100,000 and a note receivable of  approximately
$2.3  million.  During the year  ended  February  28,  1999,  $800,000  in joint
ventures assets were transferred to long term investments. During the year ended
February  28,  1999,  the  Company  sold its stock  investment  in  Telemac  for
$5,499,000,  of which  $2,750,000 was recorded as a note receivable and proceeds
of $2,699,000  were received which are reflected  above as proceeds from sale of
assets.  During the year ended February 28, 1999, the Company assumed explicitly
certain obligations of NewCom, effectively transferring approximately $9,900,000
from current notes and trade  payables to  litigation  payable.  The  $9,900,000
represents  NewCom  obligations  guaranteed by the Company,  including a line of
credit with a commercial lending institution and two other trade creditors.

          See accompanying notes to consolidated financial statements.


<PAGE>


                               AURA SYSTEMS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Years ended February 28, 2001, February 29, 2000 and February 28, 1999

(1)  Business and Summary of Significant Accounting Policies

     Business

     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.  The Company's proprietary
     and patented  technology has been developed for use in systems and products
     for commercial, industrial, consumer, and government use.

     The   Company's   operations   are  now   focused  on   manufacturing   and
     commercializing  the  AuraGen(R)   ("AuraGen")  family  of  electromagnetic
     products,  with applications for military,  industry and the consumer.  The
     AuraGen is a unique, patented electromagnetic induction machine that can be
     mounted to the vehicle  engine,  which  generates  both 110 and 220 volt AC
     power at all engine speeds  including  idle.  Commercial  production of the
     AuraGen  commenced in Fiscal 1999 and is being distributed and sold through
     dealers, distributors, and OEMs.

     The Company  intends to continue to focus its  business on the AuraGen line
     of products. In addition,  the Company is entitled to receive royalties for
     its  electro-optics  technology ("AMA") licensed to Daewoo Electronics Co.,
     Ltd. in 1992.

     In  1994,  the  Company  founded  NewCom,  Inc.   ("NewCom"),   a  Delaware
     corporation,  which  engaged in the  manufacture,  packaging,  selling  and
     distribution of computer-related communications and sound-related products,
     including  modems,  CD-ROMs,  sound cards,  speaker  systems and multimedia
     products.  During the second half of Fiscal 1999 NewCom's business suffered
     from adverse industry conditions,  including increased price reductions and
     a decline in demand  resulting  from  increased  incorporation  of computer
     peripherals  at the OEM level.  NewCom  ceased  operations  in early Fiscal
     2000.

     In  1996,  the  Company  acquired  100% of the  outstanding  shares  of MYS
     Corporation  of Japan ("MYS") to expand the range of its sound products and
     speaker  distribution  network.  MYS engaged in the manufacture and sale of
     speakers and speaker  systems for home,  entertainment  and  computers.  In
     Fiscal 2000, the Company sold MYS to MYS management.

     AuraSound  manufactured  and sold  professional  and consumer  sound system
     components  and  products.  In  July  1999,  the  Company  entered  into an
     agreement for the sale of the assets of AuraSound.

     Basis of Presentation and 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,  except as otherwise
     disclosed,  in the normal course of business.  However,  as a result of the
     Company's losses from operations such realization of assets and liquidation
     of  liabilities  is subject to  significant  uncertainties.  Management  is
     currently seeking or obtaining  additional sources of funds and the Company
     has  restructured  a  significant  portion  of its  debt  obligations.  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
     restructured  obligations.  The Company is now focusing its business on the
     AuraGen line of products.  Except as otherwise disclosed,  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  as  otherwise
     disclosed.

     Principles of Consolidation

     For  the  years  ended  February  28,  2001  and  February  29,  2000,  the
     consolidated  financial  statements include accounts of the Company and its
     wholly owned subsidiaries Aura Ceramics,  Inc. and Electrotec  Productions,
     Inc. (and its wholly owned subsidiary  Electrotec Europe).  During the year
     ended  February 29, 2000, the Company  divested its AuraSound  segment (see
     note 20).  The  AuraSound  segment  included  the  Company's  wholly  owned
     subsidiaries AuraSound,  Inc. and MYS and its subsidiaries  Audio-MYS,  MYS
     America and MYS U.S.A. In March 2000, the Company sold its interest in Aura
     Ceramics,  Inc. to  management.  For the year ended  February 28, 1999, the
     consolidated  financial  statements include accounts of the Company and its
     wholly owned subsidiaries,  MYS and its subsidiaries Audio-MYS, MYS America
     and MYS  U.S.A,  Aura  Ceramics,  Inc.,  Aura  Sound  Inc.  and  Electrotec
     Productions, Inc. (and its wholly owned subsidiary Electrotec Europe).

     For the year ended February 28, 1998, the Company's  interest in NewCom,  a
     majority  owned  subsidiary,  is  reported  on a  consolidated  basis,  the
     consolidated  financial  statements  include  100 percent of the assets and
     liabilities  of the  subsidiary,  and the ownership  percentage of minority
     interests is recorded as "Minority  Interests in  Subsidiary."  In February
     1999,  the Company  reduced its  interest in NewCom to  approximately  41%.
     Accordingly,  for the year  ended  February  28,  1999,  the  Statement  of
     Operations and Comprehensive  Loss reflects the operating results of NewCom
     through the period of majority ownership.  The balance sheet as of February
     28,  1999  reflects  the  Company's   investment  on  an  equity  basis  of
     accounting.  Prior to the reduction in ownership interest in February 1999,
     the  Company  owned  57.9% of NewCom.  In  consolidation,  all  significant
     intercompany balances and transactions have been eliminated.

     For the year ended February 28, 1999, the Company's losses from NewCom,  on
     a consolidated basis, were in excess of the Company's  allocation of losses
     as accounted for under the equity  method.  In accordance  with  Accounting
     Principles  Board  Opinion  No. 18 "The  Equity  Method of  Accounting  for
     Investments  in Common Stock" the Company has  recognized  losses up to the
     amount of their investment, advances and guarantees of indebtedness. Losses
     related  to the  consolidation  of NewCom  in excess of losses  appropriate
     under the equity method,  in the amount of $8,080,695,  are reflected as an
     other item in the Statement of Operations and Comprehensive Loss.

     For the year ended  February 28, 1999,  the minority  interest in losses of
     subsidiary are in excess of minority  interests  investments.  The minority
     interests loss in excess of investment,  in the amount of $26,561,481,  are
     reflected as an other item in the Statement of Operations and Comprehensive
     Loss.

     Revenue Recognition

     The Company recognizes revenue for product sales upon shipment. The Company
     provides for estimated  returns and allowances based upon  experience.  The
     Company has in the past earned a portion of its revenues from license fees,
     and generally  recorded those fees as income when the Company fulfilled its
     obligations  under the particular  agreement.  The Company  recognized $1.5
     million in revenue from the assignment of patents related to sound products
     in Fiscal 2000.

     Comprehensive Income

     In March  1997,  the FASB issued  SFAS No.  130,  "Reporting  Comprehensive
     Income." This statement  establishes standards for reporting and display of
     comprehensive  income and its  components in a full set of  general-purpose
     financial  statements.  This  statement  requires  that all items  that are
     required to be  recognized  under  accounting  standards as  components  of
     comprehensive income be reported in a financial statement that is displayed
     with the same  prominence  as other  financial  statements.  This  standard
     requires that an enterprise classify items of other comprehensive income by
     their nature in a financial statement and display the accumulated  balances
     of  other  comprehensive  income  separately  from  retained  earnings  and
     additional  paid-in  capital  in  the  equity  section  of a  statement  of
     financial position. The Company adopted SFAS 130 in Fiscal 1999. For Fiscal
     1999 the Company's other  comprehensive  loss consists of foreign  currency
     translations. The adoption of this statement did not have any impact on the
     Company's results of operations, financial position, or cash flows.

     Cash and Cash Equivalents

     The Company considers all highly liquid assets, having an original maturity
     of less than  three  months  when  purchased,  to be cash  equivalents.  At
     February  28, 2001 and  February  29,2000,  the  Company's  uninsured  cash
     balances total $1,158,980 and $102,098 respectively.

     Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the  reported  amounts of assets and  liabilities,
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements,  and the  reported  amounts of revenues and expenses
     during the reporting period.  Actual future results could differ from those
     estimates.

     Long-Term Investments

     The Company  accounts  for all  investments  where it holds less than a 20%
     voting interest, and cannot exercise significant influence,  where the fair
     market value of those  securities are 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 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,  these  investments  have been  accounted  for under the cost
     method.

     Inventories

     Inventories  are  stated  at the  lower of cost  (first-in,  first-out)  or
     market.

     Per Share Information

     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. Such common stock  equivalents  amount to 64,612,015 common
     shares for  convertible  debt,  warrants  and options at February 28, 2001,
     11,709,000 common shares at February 29, 2000, and 21,312,781 common shares
     at February 28, 1999.

     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.  If a  patent  or  trademark  is  rejected,  abandoned,  or
     otherwise invalidated the un-amortized cost is expensed in that period.

     Impairment of long-lived assets

     The Company reviews long-lived assets and identifiable intangibles whenever
     events or  circumstances  indicate that the carrying  amount of such assets
     may not be fully  recoverable.  The Company evaluates the recoverability of
     long-lived  assets by measuring the carrying  amounts of the assets against
     the estimated  undiscounted cash flows associated with these assets. At the
     time such evaluation  indicates that the future  undiscounted cash flows of
     certain  long-lived  assets  are not  sufficient  to  recover  the  assets'
     carrying  value,  the assets are adjusted to their fair values  (based upon
     discounted cash flows).

     During Fiscal 1999,  the Company's  management  redirected  its strategy to
     focus on the AuraGen  production.  The Company  made the  decision to cease
     operations in various divisions,  reduce overhead and sell or lease Company
     assets that were not  compatible  with the Company's  strategy.  Management
     reviewed the estimated  future cash flows related to these  operations  and
     deemed them to be  insufficient  to fully recover the carrying value of the
     assets.  Accordingly,  in Fiscal 1999 the Company  recognized  a $9,403,687
     impairment  expense to reduce the assets to their estimated fair value. The
     impairment  includes a write down of property and equipment and goodwill of
     $8,893,259  and  $510,428,  respectively.  Of this  amount,  $3,565,221  is
     included  in the loss  from  discontinued  operations  in the  Consolidated
     Statement of Operations (see also note 4).

     Research and Development

     Research and development costs are expensed as incurred.

     Advertising Costs

     Advertising costs are expensed as incurred.  Advertising charged to expense
     in Fiscal  2001,  2000 and 1999  approximated  nil,  nil and $9.4  million,
     respectively.

     Buildings, Equipment and Leasehold Improvements

     Buildings,  equipment and leasehold improvements are stated at cost and are
     being  depreciated  using the  straight-line  method  over their  estimated
     useful lives as follows:

                           Buildings                           40 years
                           Machinery and equipment           5-10 years
                           Furniture and fixtures               7 years
                           Leasehold improvements         Life of lease

     During Fiscal 1999,  management reduced previously  capitalized  amounts to
     their  estimated  fair  value,  due to  impairment  of assets.  See note on
     Impairment of long-lived assets.

     Depreciation   and  amortization   expense  of  buildings,   machinery  and
     equipment,  furniture and fixtures and leasehold improvements  approximated
     $6.3  million,  $6.5 million,  and $11.9 million for Fiscal 2001,  2000 and
     1999, respectively.

(2)  Receivables

         Receivables consist of the following:
<TABLE>
<CAPTION>
                                                                     2001              2000
                                                                     ----              ----
<S>                                                               <C>              <C>
         Commercial receivables:
           Amounts billed                                          $1,228,229       $10,100,962
           Advances due (to) from related parties                      (6,188)           31,455
           Less allowance for  uncollectible  receivables  and       (160,000)       (7,673,217)
                                                                     ---------      -----------
           sales returns
                                                                  $ 1,062,041        $2,459,200
                                                                    =========        ==========
</TABLE>

     Bad debt expense was approximately $1.3 million,  $0.15 million,  and $13.3
     million in Fiscal 2001, 2000 and 1999 respectively.

(3)  Notes Receivable

     Notes receivable consist of the following:

                                                   2001               2000
                                                   ----               ----
      MYS                                    $          0        $   570,092
      Algo                                              0          1,736,975
      Telemac                                   1,250,000          2,500,000
      Alpha Ceramics                            2,671,996                 --
                                                ---------         ----------
                                                3,921,996          4,807,067
      Less current portion                      1,405,857          3,557,067
                                                ---------          ---------
                                               $2,516,139         $1,250,000
                                                =========          =========

     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 note  receivable  from Telemac  resulting in a
     gain recognized of approximately  $850,000. The final payment of $1,250,000
     plus interest accrued at 8% is due in February 2002.

     In  March  1999,  the  Company  sold  MYS  Corp.  and  subsidiaries  to the
     management of MYS for a sales price of $4.2 million.  The terms of the sale
     called  for a $1  million  down  payment  and twelve  monthly  payments  of
     $290,000 including interest at 13.9%. All payments were made timely and the
     final  payment was received in April 2000. A loss on the sale of MYS in the
     amount of $1,696,273 is included in the loss from  discontinued  operations
     in Fiscal 2000.  In December  1999,  the Company  finalized the sale of the
     assets of the AuraSound speaker division,  total consideration received was
     approximately $2.4 million. The purchaser of AuraSound's assets is the same
     party that acquired the majority of the Company's  restructured  debt.  The
     terms of the  sale  called  for a down  payment  of  $100,000  and  monthly
     payments of $100,000  plus interest at a rate of 8%. All payments have been
     made timely.  A loss on the sale of the  AuraSound  assets of $1,001,369 is
     included in the loss from discontinued operations in Fiscal 2000.

     In March 2000, the Company sold the assets of its ceramics  facility to the
     president of the facility for $3.5 million  resulting in a gain  recognized
     of  $1,756,746.  The terms of the sale  called  for a note in the amount of
     $2.5 million with  interest at 8%, a down payment of $100,000 and a payment
     at closing of $100,000  plus  payments to third  parties of $800,000.  This
     facility accounted for $2.9 million or 50% of revenues in Fiscal 2000.

(4)  Long Term Investments

     Long-term investments consist of the following:
<TABLE>
<CAPTION>

                                                                2001                      2000
                                                                ----                      ----
<S>                                                        <C>                       <C>
                  Aquajet Corporation                      $    683,835              $    923,835
                  Alaris Industries, Inc.                     1,200,000                 1,200,000
                                                              ---------                 ---------
                                                           $  1,883,835                $2,123,835
                                                            ===========                ==========
</TABLE>

     The  above  investments  consist  solely of  common  stock  and  constitute
     approximately  4.2% of the  outstanding  shares of Aquajet  Corporation and
     approximately 2.7% of the outstanding shares of Alaris Industries, Inc.

     The Company  maintains an investment in Aquajet,  Inc., a development stage
     company  that is in the  process  of  developing  and  marketing  its water
     recreation vehicle.  Aquajet has been involved in raising financing for the
     past several years in order to exploit their  business plan. In relation to
     this  Aquajet has been  marginally  successful  and has  developed a strong
     marketing  and  potential  customer  base,  but to date has been  unable to
     generate  sufficient  sales to fund its operations.  The company expects to
     realize its asset through the eventual  public  offering or  acquisition of
     Aquajet.  However,  that  exit is not  believed  to be  likely  in the near
     future. Our estimated realization of the asset is approximately three years
     from the date of the financial statements.  Due to this, we have recorded a
     reserve of  $240,000  to account for the time value of money at an implicit
     rate of 10% for the three-year period.

(5)  Joint Ventures and Other Agreements

     (a)  Malaysian Joint Venture

          In  1993,  the  Company  entered  into an  agreement  with  Burlington
          Technopole SDN. BHD., a Malaysian  corporation  (Burlington),  for the
          formation of a joint venture to  manufacture  and sell speakers  using
          Aura's proprietary  technology.  In Fiscal 1999, the joint venture was
          terminated  and a total of  $1,064,911  in joint  venture  losses  and
          write-offs were recorded during Fiscal 1999.

     (b)  Aura-Dewan Joint Venture

          In 1995, the Company entered into an agreement with K&K Enterprises of
          India ("K&K") for the formation of a joint venture to manufacture  and
          sell  speakers  using  Aura's  proprietary  technology.  In 1995,  the
          Company also entered into an agreement with K&K for the formation of a
          joint venture to manufacture Aura's Bass ShakerTM. In Fiscal 1999, the
          joint venture was  terminated and a total of $534,911 in joint venture
          losses and  write-offs  were  recorded  during  Fiscal 1999. In Fiscal
          2000,  the  Company's  remaining  investment  in property of the joint
          venture  was  disposed  of and  certain  claims and  liabilities  were
          satisfied.  A loss on disposal of assets,  in the amount of  $800,000,
          was  recorded in Fiscal 2000.  The $800,000  loss is included in other
          income and expense on the  statement of  operations  and is more fully
          detailed  in  Footnote  18 where it is included in the gain or loss on
          disposal of assets.

     (c)  Daewoo Agreement

          In 1992, the Company  entered into a joint  development  and licensing
          agreement with Daewoo Electronics Co., Ltd.  ("Daewoo") to develop and
          commercialize  televisions  using Aura's AMA(TM)  display  technology.
          Aura is to receive a fixed royalty (depending on television size), for
          each television set  manufactured by Daewoo or licensed by Daewoo to a
          third  party.  Daewoo was taken over by its  creditors  during  Fiscal
          1999. No  assurances  can be given as to the future plans of the "AMA"
          technology at Daewoo.

     (d)  Eric Joint Venture

          In 1997, the Company entered into an agreement with the European Group
          to form a joint venture for sales,  marketing and further  development
          of motion base simulators using the Company's proprietary  technology.
          In Fiscal 1999, as a result of its financial crisis the Company ceased
          its  commitment to continue to develop  improvements  to the Company's
          motion base simulator technology.  The parties agreed to terminate the
          joint venture and $3,856,091 was written-off to loss in joint ventures
          in Fiscal 1999.

     (e)  Microbell Joint Venture

          In 1995, the Company  entered into an agreement with Microbell to form
          a joint  venture to further  develop and  commercialize  patented  and
          proprietary technology developed by Microbell.  In Fiscal 1999, due to
          Aura's  inability  to continue to fund the joint  venture as required,
          the joint venture was terminated and $635,902 was  written-off to loss
          in joint ventures.

          The losses noted above are included in other income and expense on the
          statement  of  operations  as more  fully  detailed  in Note 18 to the
          financial statements.

(6)  Related Party Transactions

     Notes and advances due (to) from related parties,  aggregated  $(6,188) and
     $31,455 at February 28, 2001 and February 29, 2000, respectively,  included
     in current receivables.

(7)  Inventories

     Inventories,  stated at the lower of cost (first-in,  first-out) or market,
consist of the following:

<TABLE>
<CAPTION>
                                                                       2001                  2000
                                                                       ----                  ----
<S>                                                                <C>                   <C>
         Raw materials                                             $3,516,826            $4,205,828
         Finished goods                                             6,530,977             7,310,335
         Reserve for potential product obsolescence                  (291,404)             (326,936)
                                                               ---------------       ---------------
                                                                   $9,756,399           $11,189,227
                                                               ==============        ==============
</TABLE>

     At February 28, 2001,  inventories  consist  primarily  of  components  and
     completed units for the Company's AuraGen product.

(8)  Property and Equipment

     Property and Equipment, at cost is comprised as follows:
<TABLE>
<CAPTION>

                                                                          2001                2000
                                                                          ----                ----
<S>                                                                  <C>                   <C>
         Land                                                        $  3,187,997          $  3,187,997
         Buildings                                                      8,708,796             8,708,796
         Machinery and equipment                                       26,840,274            27,755,903
         Furniture, fixtures and leasehold improvements                 2,551,944             2,566,721
                                                                     ------------          ------------
                                                                      $41,289,011           $42,219,417
                                                                       ==========           ===========
</TABLE>

(9)  Notes Payable and Other Liabilities

     Notes Payable and Other Liabilities consist of the following:

                                             2001              2000
                                             ----              ----
Litigation payable                         $2,597,900    $    2,351,521
Line of credit (a)                          1,984,000         2,584,000
Notes payable-equipment (b)                    26,093            31,353
Notes payable-buildings (c)                 5,248,205         5,535,693
Unsecured notes payable (d)                 7,843,321        10,178,376
Trade debt (e)                              7,960,027        10,961,151
Secured notes payable (f)                  12,825,562        15,309,622
                                           ----------        ----------
                                           38,485,108        46,951,716
Less: current portion                      14,300,594         9,899,531
                                       --------------    --------------
Long term portion                          24,184,514        37,052,185
Reserve for environmental cleanup                  --           554,510
                                          -----------       -----------
                                          $24,184,514    $   37,606,695
                                           ==========     =============

     (a)  The line of credit  consists of a single  credit line in the amount of
          $3  million,  bearing  an  interest  rate of 12% and is  secured  by a
          general  security  interest  in the  assets of the  Company.  The line
          currently  calls for a monthly  principal  payment  of  $100,000  plus
          accrued  interest,  and does not allow for any additional  draws.  The
          Company is in violation of substantially  all of the original terms of
          this  agreement,  for  which it has  received  a waiver  from the bank
          effective through June 30, 2001.

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

     (c)  Notes payable-buildings  consists of a 1st Trust Deed on two buildings
          in  California,  due in Fiscal  2009  bearing  interest at the rate of
          7.625%.

     (d)  Unsecured notes payable consists of two notes at February 28, 2001 and
          four notes at February 29, 2000 all bearing  interest at a rate of 8%.
          Included in unsecured notes payable is an accrued estimated  liability
          of $5,500,000 to Deutsche  Financial Services as a result of a written
          guarantee  of NewCom  debt.  At  February  28,  2001,  this  amount is
          classified as a current  liability and is included in Notes Payable on
          the  balance  sheet  as a  result  of a  settlement  reached  with DFS
          subsequent to the end of the Fiscal year.  The  settlement  called for
          the  issuance  of  10,000,000  shares of Aura common  stock  valued at
          $4,000,000 and the payment of $350,000 in cash.  This  settlement will
          result in a gain on the settlement of the estimated recorded liability
          of  $1,150,000,  which will be recorded in the first quarter of Fiscal
          2002.

     (e)  Trade  debt was  restructured  with  payment  terms  over a three year
          period with interest at 8% per annum commencing in January 2000.

     (f)  Secured  notes payable  consists of three notes bearing  interest at a
          rate of 8%. On one of the secured  notes,  in the event of default the
          holder is entitled to convert the unpaid  principal  and interest into
          common stock of the Company at $0.60 per share;  however,  the Company
          is entitled to a discount  if the note is prepaid,  which  discount is
          initially  20%  of the  amount  prepaid,  and  the  discount  declines
          proportionally over the three year term of the note.

          The reserve for  environmental  cleanup  included at February 2000 was
          associated with the ceramics  facility.  This liability was assumed by
          the purchaser of the assets of the ceramics  facility and is no longer
          a recorded liability as of February 2001.

          Annual  maturities of long term notes payable and  litigation  payable
          for the next fiscal years are as follows:

                               Fiscal Year Amount
                                         2002                 $  14,300,594
                                         2003                    17,941,630
                                         2004                     1,264,240
                                         2005                       126,320
                                         2006                       129,482
                                         thereafter               4,722,842
                                                                  ---------
                                                                $38,485,108

          In Fiscal 1993, the Company  issued its Secured 7%  Convertible  Notes
          due 2002 in the total  amount of $5.5  million.  In Fiscal  1999,  the
          remaining  obligation  of  $2,122,900,  related  to  these  notes  was
          redeemed by the Company.

          In Fiscal  1999,  the  Company  issued $8 million of  unsecured  notes
          payable  to  investors  and  $4,662,900  of secured  notes  payable to
          investors.  During  Fiscal 2000 the Company  redeemed  $1.6 million of
          convertible  notes  issued in Fiscal 1998 with the payment of $430,000
          in cash  and  the  issuance  of  3,500,000  shares  of  common  stock.
          Additionally,  in Fiscal 1999,  $9,662,184 worth of convertible  notes
          issued in Fiscal 1998 plus interest of $547,249,  were  converted into
          16,513,282 shares of common stock.

          In Fiscal 2000, the Company restructured much of its convertible notes
          payable through debt forgiveness and equity conversion.

(10) Accrued Expenses

     Accrued expenses consist of the following:

                                               2001              2000
                                               ----              ----
Accrued payroll and related expenses        $   680,524       $   582,850
Bond interest payable                           280,228           261,330
Deferred income                                      --           500,000
Other                                           324,002           290,120
                                             ----------        ----------
                                            $ 1,284,754       $ 1,634,300
                                             ==========        ==========

(11) Income Taxes

     At February 28, 2001, the Company had net operating loss carry-forwards for
     Federal and state  income tax  purposes of  approximately  $262 million and
     $129 million respectively, which expire through 2021.

     Under SFAS 109  "Accounting  for Income  Taxes" the  Company  utilizes  the
     liability method of accounting for income taxes.  Accordingly,  the Company
     has  recorded a deferred  tax  benefit of  approximately  $105  million for
     Fiscal 2001 and $97 million for Fiscal 2000.  The Company has also recorded
     a  valuation  account  to fully  offset  the  deferred  benefit  due to the
     uncertainty of the  realization  of this benefit.  The deferred tax benefit
     consists solely of the benefit of the net operating loss carryforward.

(12) Common Stock, Stock Options and Warrants

     At February 28, 2001 and 2000, the Company had 500,000,000  shares of $.005
     par value common stock authorized for issuance.

     At February 28, 2001 there were warrants outstanding to purchase 21,751,015
     shares of the  Company's  common stock  exercisable  at an average price of
     $0.84 per share.

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

     A summary of activity in the directors stock option plan follows:
<TABLE>
<CAPTION>

                                                                     Shares        Exercise Price

<S>                                      <C>                       <C>              <C>
         Options outstanding at February 28, 1998                   1,059,578        $  1.44-5.50
                                                                    ---------         -----------

         Expired                                                     (499,578)       $  1.44-5.50
                                                                      --------        -----------
         Options outstanding at February 28,1999                      560,000        $  2.06-4.75

         Expired                                                      (60,000)       $  3.00-4.75
                                                                      --------        -----------
         Options outstanding at February 29, 2000                     500,000        $  2.06-2.30
                                                                      -------           ---------

         Options Outstanding at February 28, 2001                     500,000        $  2.06-2.30
                                                                      =======           =========
</TABLE>

     The following table summarizes  information about director stock options at
February 28, 2001:

<TABLE>
<CAPTION>
                                 Number             Average             Weighted              Number
           Range of          Outstanding at     Remaining Life      Average Exercise      Exercisable As
                                                              -
        Exercise Price          2/28/01            in Years              Price              of 2/28/01
        --------------          -------            --------              -----              ----------

<S>          <C>                  <C>                <C>                  <C>                    <C>
             $2.30                50,000             6.13                 $2.30                  50,000
             $2.06               450,000             6.36                 $2.06                 400,000
</TABLE>

(13) Employee Stock Plans

     As of February 28, 2001,  the Company has one employee  benefit  plan:  The
     Employee Stock  Ownership  Plan (ESOP).  In addition,  the options  granted
     under the 1989 Stock Option Plan are valid and subject to exercise.

     The ESOP is a qualified  discretionary  employee stock  ownership plan that
     covers substantially all employees.  This plan was formally approved by the
     Board of Directors during Fiscal 1990. The Company made no contributions to
     the ESOP in Fiscal 2001, 2000 and 1999 respectively.

     In March 2000,  the  Company's  Board of  Directors  adopted the 2000 Stock
     Option Plan, a  nonqualified  plan which was  subsequently  approved by the
     shareholders.  The Stock  Option  Plan  authorizes  the grant of options to
     purchase  up to 10% of the  Company's  outstanding  common  shares.  Shares
     currently under option generally vest ratably over a five year period.

     In October 1995, the Financial  Accounting  Standards Board issued SFAS No.
     123  "Accounting  for  Stock-Based  Compensation,"  which  contains  a fair
     value-based method for valuing  stock-based  compensation that entities may
     use, which measures  compensation  cost at the grant date based on the fair
     value of the  award.  Compensation  is then  recognized  over  the  service
     period,  which is usually the vesting period.  Alternatively,  the standard
     permits  entities to continue  accounting  for  employee  stock  option and
     similar equity  instruments under APB Opinion No. 25, "Accounting for Stock
     Issued  to  Employees."   The  Company  has  adopted  only  the  disclosure
     provisions of SFAS No. 123. It applies Accounting  Principles Board Opinion
     No.  25,   "Accounting   for  Stock  Issued  to  Employees,"   and  related
     interpretations in accounting for its stock issuances to employees and does
     not recognize  compensation expense for its stock-based  compensation other
     than for restricted stock and options issued to outside third parties.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
     estimating  the  fair  value  of  traded  options  which  have  no  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.

     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
     period ended February 28, 2001:

                  Net loss
                      As reported                           $ (20,929,971)
                      Pro forma                             $ (22,114,397)
                  Basic loss per common share
                      As reported                           $ (0.08)
                      Pro forma                             $ (0.08)

     For the years  ended  February  29,  2000 and  February  28, 1999 pro forma
     amounts related to option grants were not material.

     For the 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  assumptions:  dividend yield of 0%, expected  volatility of 50%,
     risk-free  interest rates of 4.9% to 6.0%, and expected life of 1.5 and 2.0
     years.

     The weighted-average  fair value of options granted during the period ended
     February 28, 2001 for which the  exercise  price equals the market price on
     the grant  date was  $0.09,  and the  weighted-average  exercise  price was
     $0.32.  The  weighted-average  fair value of options  granted for which the
     exercise  price was  greater  than the  market  price on the grant date was
     $0.07, and the  weighted-average  exercise price was $0.36. No options were
     granted for which the exercise  price was less than the market price on the
     grant date.

     The weighted-average  remaining contractual life of the options outstanding
     at  February  28,  2001 is 8.8 years.  The  exercise  prices of the options
     outstanding  at  February  28,  2001  ranged  from  $0.31  to  $7.31,   and
     information relating to these options is as follows:
<TABLE>
<CAPTION>

                                                           1989 Plan                             2000 Plan
                                                           ---------                             ---------
                                                    Shares       Exercise Price         Shares           Exercise Price
                                                    ------       --------------         ------           --------------
<S>                                               <C>               <C>               <C>                 <C>
Options outstanding at February 28, 1998            3,660,000         $1.44-7.31               --                   --
                                                  -----------          ---------    -------------        -------------

Grants                                              2,900,000               3.31               --                   --
Cancellations                                         (59,700)         1.44-7.31               --                   --
Exercises                                             (50,000)              2.06               --                   --
                                                  ------------     --------------   -------------        -------------
Options outstanding at February 28, 1999            6,450,300          1.44-7.31

Cancellations                                        (454,500)         2.06-7.31               --                   --
Expired                                              (131,800)         3.06-4.12               --                   --
                                                  ------------       -----------    -------------        -------------
Options outstanding at February 29, 2000            5,864,000          1.44-7.31

Grants                                                     --                 --       17,565,500           $0.31-0.60
Cancellations                                          (5,000)              3.00        (132,500)                 0.31
Expired                                              (431,000)              1.44               --                   --
                                                  ------------     -------------    -------------        -------------
Options Outstanding at February 28, 2001            5,428,000         $1.79-7.31       17,433,000           $0.31-0.60
                                                  ===========         ==========    =============        =============
</TABLE>

The following  table  summarizes  information  about  employee  stock options at
February 28, 2001:
<TABLE>
<CAPTION>

                                 Number             Average             Weighted              Number
           Range of          Outstanding at     Remaining Life      Average Exercise      Exercisable As
                                                              -
        Exercise Price          2/28/01            in Years              Price              of 2/28/01
        --------------          -------            --------              -----              ----------

<S>          <C>                   <C>               <C>                  <C>                <C>
             $7.25                 6,000             0.75                 $7.25                   6,000
             $3.00                15,000             1.62                 $3.00                 215,000
             $7.31                 6,000             2.60                 $7.31                   6,000
             $3.00                20,000             5.58                 $3.00                  20,000
          $1.79-2.15           2,481,000             6.42                 $2.04               2,481,000
          $3.13-3.31           2,900,000             7.05                 $3.30               1,160,000
          $0.31-0.60          17,433,000             9.25                 $0.33                       0
</TABLE>

(14) Leases

     At February 28, 2001, the Company has no long term operating leases. Rental
     expense charged to operations  approximated $.1 million,  $.9 million,  and
     $1.8 million in Fiscal 2001, 2000 and 1999, respectively.

(15) Significant Customers

     The Company sold its AuraGen  product to six significant  customers  during
     Fiscal  2001 for a total of  approximately  $1.35  million  or 53.8% of net
     revenues. Five of these companies are Stewart & Stevenson Services entities
     and account for  approximately  $1.0  million or 40% of net  revenues  with
     Americas Body Company  accounting for an additional  13.6% or approximately
     $340,000 of net revenues.

     The Company sold ceramics related products to Honeywell, Inc. during Fiscal
     2000 for a total of approximately $2.1 million or 36.3% of net revenues.

     The Company on a consolidated basis sold computer related products to three
     significant  customers  during  Fiscal 1999.  Sales of  communications  and
     multimedia products to major mass merchandisers Best Buy, Circuit City, and
     Staples accounted for $12.6 million or 23.5% of net revenues. None of these
     customers are related to the Company or any other customer of the Company.

(16) Commitments and Contingencies

     The Company is engaged in various legal actions  listed below.  In the case
     of a judgment or settlement,  appropriate  provisions have been made in the
     financial statements.

     NewCom Related Litigation


     Deutsche Financial Services v. Aura (Settled March 2001)

     In June 1999, a lawsuit naming Aura was filed in the United States District
     Court for the Central District of California,  Deutsche  Financial Services
     ("DFS") vs. Aura (Case No.  99-03551 GHK (BQRx)).  The  complaint  followed
     DFS'  termination  of its credit  facility with NewCom of  $11,000,000  and
     seizure of  substantially  all of NewCom's  collateral  in April  1999.  It
     alleged,  among  other  things,  that Aura was  liable to DFS for  NewCom's
     indebtedness  under the secured credit facility  purportedly  guaranteed by
     Aura in 1996, well prior to the NewCom initial public offering of September
     1997.  Aura  responded,  denying  DFS' claims and  asserted in its defense,
     among  other  things,  that  the  guarantee,  if any,  was  discharged.  In
     addition, Aura through its counsel,  asserted cross-claims for, among other
     things, tortuous lender liability,  alleging that DFS wrongfully terminated
     the NewCom credit  facility,  wrongfully  seized the NewCom  collateral and
     wrongfully  foreclosed  upon NewCom  collateral,  acting in a  commercially
     unreasonably  manner.  A panel of three  arbitrators  had been selected and
     appointed  by  the  American  Arbitration  Association,  with  the  Company
     expecting a hearing on the matter  sometime in the first half of 2001.  The
     Company believed it had meritorious defenses and cross-claims.

     The  company  entered  into a  definitive  Settlement  and  Mutual  Release
     Agreement  effective  March 12, 2001 (the  "Settlement")  providing for the
     settlement  of  litigation.  Under  the  terms of the  Settlement  DFS will
     receive cash payments  totaling  $350,000 and  10,000,000  shares of Aura's
     common  stock in exchange for mutual  releases.  DFS may not sell more than
     5,000,000  shares  per year  during  the  first  two  years  following  the
     settlement,  may not sell any shares for the first 120 days  following  the
     settlement,  and may not sell more than 50,000 shares in a single day. Aura
     will retain the right to repurchase unsold shares under certain  conditions
     for a period of two years.  During the first and second years following the
     Settlement, Aura may repurchase unsold shares in the possession of DFS at a
     price of $.80 per share in the first year and $1.00 per share in the second
     year.  As part of the  Settlement,  DFS will  assign  to Aura its  security
     interest  in assets  pledged  by  NewCom,  Inc.  to DFS to secure  NewCom's
     indebtedness.  Aura believes that DFS has already foreclosed upon all known
     assets,  claims, or entitlements,  which include inventory and receivables.
     Going forward, funds received by DFS, if any, with respect to the assets of
     NewCom, less costs and expenses incurred,  will be held in trust by DFS for
     Aura.  Aura  may  also  prosecute  or  pursue  a  NewCom  claim,  asset  or
     entitlement,  which is subject to DFS' lien. Aura's receipt of any funds is
     conditioned  upon the bid price of Aura  Common  Stock  reaching  $0.80 per
     share on ten business  days during the first year or $1.00 per share during
     the second year. To the extent Aura recovers any funds,  it will hold it in
     trust  for DFS  until  the bid  price of Aura  reaches  the  above  levels,
     respectively,  or until the 730th day following  the execution  date of the
     Settlement,  when  Aura  must  then pay any  recovered  funds to DFS if the
     minimum bid prices set forth above have not been met.

     Morganstein v. Aura (Settled October 1999)

     On April 28, 1997,  a lawsuit  naming Aura,  certain of its  directors  and
     officers,  and the Company's  independent  accounting firm was filed in the
     United  States  District  Court for the  Central  District  of  California,
     Morganstein v. Aura Systems,  Inc.,  et. al. (Case No. CV 97-3103),  before
     the Honorable Steven Wilson. A follow-on complaint, Ratner v. Aura Systems,
     Inc., et. al. (Case No. CV 97-3944),  was also filed and later consolidated
     with  the  Morganstein   complaint.   The  consolidated  amended  complaint
     purported  to be a  securities  class  action on behalf of all  persons who
     purchased  common  stock of Aura during the period from January 18, 1995 to
     April 25, 1997, inclusive.  The complaint alleged that as a result of false
     and misleading information disseminated by the defendants, the market price
     of Aura's common stock was  artificially  inflated during the Class Period.
     The  complaint  contained  allegations  which  asserted  that  the  company
     violated federal  securities laws by selling Aura Common stock at discounts
     to the prevailing  U.S. market price under  Regulation S without  informing
     Aura's shareholders or the public at large.

     In June 1998, the Court entered an order staying further discovery in order
     to facilitate completion of settlement  discussions between the parties. On
     October 12, 1998, the parties  entered into a stipulation for settlement of
     all claims,  subject to approval by the Court.  Under the  stipulation  for
     settlement  Aura  agreed to pay $4.5  million  in cash or stock,  at Aura's
     option,  plus 3.5  million  warrants  at an  exercise  price of  $2.25.  In
     addition,  Aura's  insurance  carrier  agreed  to pay  $10.5  million.  The
     settlement  was  finally  approved  by the  Court in  October  1999 and was
     thereafter  amended in December  1999 to allow Aura to defer payment of the
     settlement  amount until April 2000 in exchange for an additional 2 million
     shares of Aura Common Stock, subject to certain  adjustments.  The deferral
     resulted from the limitation on the number of shares authorized.  The final
     distribution of stock and warrants to class members occurred in June 2000.


     Excalibur v. Aura

     On November 12, 1999, a lawsuit was filed by three  investors  against Aura
     and Zvi Kurtzman,  Aura's Chief Executive Officer,  in Los Angeles Superior
     Court entitled  Excalibur Limited  Partnership v. Aura Systems,  Inc. (Case
     No. BC220054)  arising out of two NewCom,  Inc.  financings  consummated in
     December 1998.

     The NewCom financings  comprised (1) a $3 million investment into NewCom in
     exchange for NewCom  Common Stock,  Warrants for NewCom  Common Stock,  and
     certain   "Repricing  Rights"  which  entitled  the  investors  to  receive
     additional  shares in the event the price of NewCom Common Stock fell below
     a specified level, and (2) a loan to NewCom of $1 million in exchange for a
     Promissory  Note  and  Warrants  to  purchase  NewCom  Common  Stock.   The
     Plaintiffs allege in their complaint that Aura breached its agreements with
     the Plaintiffs by, among other things,  failing to register the Aura Common
     Stock. The Plaintiffs further allege that Aura misrepresented its intention
     to register the Aura shares in order to induce the  Plaintiffs to loan $1.0
     million  to  NewCom.  The  Complaint  seeks  damages  of not less than $4.5
     million.

     Aura has alleged certain cross-claims against the Plaintiffs. Aura contends
     that Plaintiffs violated their contractual  obligations to Aura by engaging
     in unlawful "short sales" of NewCom stock,  commencing on January 20, 1999,
     and were in violation of certain covenants in the subscription  agreements.
     Aura  contends  that,  as a result of such  violations  and on the basis of
     other factors and legal theories,  Aura's obligations to deliver the shares
     and to make any payments to Plaintiffs was terminated.  Aura further claims
     that its consent to its agreements with Plaintiffs was procured as a result
     of  fraudulent  misrepresentations  by  Plaintiffs.  Aura also has asserted
     claims  against  Plaintiffs  for  damages  based  on  alleged  breaches  of
     Plaintiffs'  contractual  obligations  to Aura and on  Plaintiffs'  alleged
     misrepresentations to Aura.

     All  individually  named defendants have been dismissed by agreement of the
     parties and the case is scheduled for trial on July 17, 2001. The Court has
     granted  Aura's  motion   recently  to  require   Plaintiffs'  to  post  an
     undertaking  in the amount of $225,000 to secure any cost award that may be
     entered in Aura's favor on the basis that it is "reasonably  possible" that
     Aura will prevail in this matter.  Aura has also moved for summary judgment
     which is scheduled to be heard in June 2001.

     The Company  believes that it has meritorious  defenses and cross-claims to
     the Plaintiffs' allegations.  However, no assurances can be given as to the
     ultimate outcome of this proceeding.

     Securities and Exchange Commission Settlement

     In October 1996,  the  Securities  and Exchange  Commission  ("Commission")
     issued  an  order   (Securities  Act  Release  No.  7352)   instituting  an
     administrative  proceeding against Aura Systems, Zvi Kurtzman,  and an Aura
     former  officer.  The proceeding was settled on consent of all the parties,
     without  admitting  or denying  any of the  Commission's  findings.  In its
     order,  the  Commission  found  that  Aura  and  the  others  violated  the
     reporting,  record keeping and anti-fraud provisions of the securities laws
     in 1993 and 1994 in connection  with its reporting on two  transactions  in
     reports  previously  filed  with the  Commission.  The  Commission's  order
     directs  that each party  cease and desist from  committing  or causing any
     future violation of these provisions.

     The Commission did not require Aura to restate any of the previously issued
     financial statements or otherwise amend any of its prior reports filed with
     the Commission.  Neither Mr. Kurtzman nor anyone else personally  benefited
     in any way  from  these  events.  Also,  the  Commission  did not  seek any
     monetary  penalties  from Aura,  Mr.  Kurtzman or anyone  else.  For a more
     complete  description  of the  Commission's  Order,  see  the  Commission's
     release referred to above.

     Other Legal Actions

     The  Company is also  engaged in other  legal  actions.  In the  opinion of
     management,  based upon the advice of counsel,  the ultimate  resolution of
     these  matters  will  not  have a  material  adverse  effect  on  financial
     conditions, results of operations or cash flow.

(17) Concentrations of Credit Risk

     Financial  instruments  that subject the Company to concentration of credit
     risk are cash  equivalents,  trade  receivables,  notes  receivable,  trade
     payables  and  notes  payable.   The  carrying  value  of  these  financial
     instruments  approximate  their  fair  value at  February  28,  2001.  Cash
     equivalents  consist  principally of short-term  money market funds,  these
     instruments are short term in nature and bear minimal risk.

     For cash, cash  equivalents,  trade  receivables  and trade  payables,  the
     carrying  value of these  amounts is a  reasonable  estimate  of their fair
     value.

     The fair value of noncurrent  receivables,  including notes  receivable are
     estimated by using the current  rates at which  similar loans would be made
     to such  borrowers  based on the  remaining  maturities,  consideration  of
     credit risks, and other business issues pertaining to such receivables.

     Long and Short Term Debt: The fair values of debt instruments are estimated
     based on quoted market  prices or, where quoted  prices are not  available,
     estimated  based upon  borrowing  rates for similar debt  instruments or on
     estimated prices based on current yields for debt issues of similar quality
     and terms. The Company does not have any unused  borrowing  capacity and is
     therefore unable to determine an applicable  incremental borrowing rate. As
     a result,  a fair market value for the debt,  other than carrying value, is
     not determinable.

     Considerable  judgment is necessarily  required in interpreting market data
     to develop estimates of fair value.  Accordingly,  the estimates used by us
     are not  necessarily  indicative  of the  amounts  that the  Company  would
     realize in a current market exchange.

     The Company  performs  credit  background  checks and  evaluates the credit
     worthiness of all potential new  customers  prior to granting  credit.  UCC
     financing statements are filed, when deemed necessary.

(18) Other (Income) and Expenses

     Other (income) and expenses consist of:
<TABLE>
<CAPTION>

                                                           2001                  2000                  1999
                                                           ----                  ----                  ----

<S>                                                     <C>                   <C>                   <C>
            Class action settlements                    $          --         $          --         $   5,200,000
            Equity in losses of unconsolidated
                 joint ventures                                    --                    --             6,268,384
            (Gain) loss on disposal of assets              (1,756,746)               93,638               925,525
            Loss on disposal of investment                         --                    --             4,877,839
            Other income                                     (446,399)           (1,454,641)             (906,921)
            Interest expense                                2,263,916             4,476,690            11,679,701
                                                        -------------             ---------            ----------
                                                        $      60,771         $   3,115,687         $  28,044,528
                                                         ============             =========          ============
</TABLE>

(19) Segment Reporting

     The Company  adopted  Statement of Financial  Accounting  Standards No. 131
     ("SFAS 131"),  "Disclosures  about  Segments of an  Enterprise  and Related
     Information,"  as of February 28, 1999. SFAS 131 establishes  standards for
     the way public  business  enterprises  report  information  about operating
     segments in annual financial  statements and requires those  enterprises to
     report selected  information about operating  segments in interim financial
     reports issued to shareholders.  It also establishes  standards for related
     disclosures  about  products  and  services,  geographic  areas  and  major
     customers.  SFAS  131  defined  operating  segments  as  components  of  an
     enterprise about which separate financial  information is available that is
     evaluated  regularly by the chief operating decision makers in deciding how
     to  allocate  resources  and in  assessing  performance.  The  Company  has
     aggregated  its  business   activities  into  three   operating   segments:
     electromagnetic  and  electro-optical  technology (Aura),  computer related
     communications  (NewCom) and sound related products including  professional
     and consumer sound system components (AuraSound).

     The  electromagnetic  and  electro-optical   technology  operating  segment
     consists  of the  development,  commercialization  and  sales of  products,
     systems and components using patented and proprietary  electromagnetic  and
     electro-optical  technology. The Company has aggregated all electromagnetic
     and  electro-optical   operating  units  due  to  commonality  of  economic
     characteristics,  technology employed, and class of customer. This included
     the ceramics  business  which was involved in the  manufacture  and sale of
     piezo electric based  electro-magnetic micro actuators.  In addition,  this
     segment also includes our corporate  headquarters,  revenues generated from
     the sale of computer  monitors,  activity from Electrotec and license fees.
     The overall  management and operating results for this segment are based on
     the activities and operations as noted.

     The computer related  communications  and sound related products  operating
     segment  consisted  of the  manufacturing  and selling of high  performance
     computer  communication  and multimedia  products for the personal computer
     market.  The segment also  included  internal and external data fax modems,
     speaker phones,  sound cards, and multimedia  kits. This operating  segment
     suffered  significant  operating  losses during the year ended February 28,
     1999 and ceased operations in early Fiscal 2000.

     The sound segment consisted of the manufacture and sale of professional and
     consumer  sound  system  components  and  products,   including   speakers,
     amplifiers,  and Bass Shakers.  AuraSound  reflected the aggregate  segment
     operating units based on economic  characteristics,  products and services,
     the  production  process  class  of  customer  and  distribution   process.
     AuraSound was sold during Fiscal 2000.
<TABLE>
<CAPTION>

                                      Aura               NewCom             AuraSound          Consolidated
Net Revenues*                                        (in thousands)
<S>              <C>             <C>                  <C>                 <C>                 <C>
                 2001            $       2,513        $           --      $           --      $         2,513
                 2000            $       5,788        $           --      $           --      $         5,788
                 1999            $       6,830        $       46,820      $           --      $        53,650

Loss from Operations
                 2001            $     (20,869)       $           --      $           --      $       (20,869)
                 2000            $     (18,510)       $           --      $           --      $       (18,510)
                 1999            $     (54,396)       $      (94,357)     $           --      $      (148,753)

Identifiable Assets
                 2001            $      45,278        $           --      $           --      $        45,278
                 2000            $      56,122        $           --      $           --      $        56,122
                 1999            $      63,754        $           --      $       26,389      $        90,143

Depreciation and Amortization
                 2001            $       7,620        $           --      $           --      $         7,620
                 2000            $       6,854        $           --                  --      $         6,854
                 1999            $       7,375        $        1,511      $        4,099      $        12,985

Capital Expenditures
                 2001            $         244        $           --      $           --      $           244
                 2000            $          16        $           --      $           --      $            16
                 1999            $       2,450        $          161      $        1,443      $         4,054

Number of operating locations at year-end (unaudited)
                 2001                  1                   --                  --                   1
                 2000                  2                   --                  --                   2
                 1999                  2                    2                   5                   9
</TABLE>

*    Includes  revenue from  external  customers  for all groups of products and
     services in each  segment  reported.  Products  and  services  sold by each
     segment  are  generally  similar in  nature;  also it is  impracticable  to
     disclose revenues by product.

Segment Reporting
Net Revenue from customer geographical segments are as follows (in thousands):
<TABLE>
<CAPTION>

                                            2001                         2000                       1999
                                            ----                         ----                       ----
<S>                                   <C>             <C>       <C>               <C>        <C>             <C>
U.S.                                  $  2,464        98.1%     $    5,757        99.4%      $ 51,879        96.7%
Canada                                      31         1.2              10          .2            189         0.4
Latin America                               --          --              --         --             109         0.2
Europe                                      --          --              --         --           1,343         2.5
Asia                                        18         0.7              21         0.4            130         0.2
                                        ------      --------       -------     --------     ---------       -----
                                      $  2,513       100.00%       $ 5,788       100.00%     $ 53,650       100.00%
                                      ========       =======       =======      =======      ========       ======
</TABLE>

     All of the Company's operating  long-lived assets are located in the United
     States

(20) Discontinued Operations

     In June  1999  and  March  1999,  the  Company  divested  its  interest  in
     AuraSound,  Inc. and the MYS group of entities,  respectively.  Pursuant to
     Accounting  Principles Board Opinion ("APB") No. 30, "Reporting the Results
     of Operations-Reporting  the Effects of Disposal of a Segment of a Business
     and   Extraordinary,   Unusual  and   Infrequently   Occurring  Events  and
     Transactions,"  the consolidated  financial  statements of the Company have
     been  reclassified to reflect the disposition of the AuraSound segment as a
     discontinued operation.  Net operating revenues for discontinued operations
     for Fiscal 2001,  2000 and 1999 were nil and  approximately  $1,037,000 and
     $27,868,000 respectively.

(21) Recently issued accounting pronouncements

     In December 1999, the  Securities  and Exchange  Commission  staff released
     Staff  Accounting  Bulletin  ("SAB")  No.  101,  "Revenue   Recognition  in
     Financial   Statements,"   to   provide   guidance   on  the   recognition,
     presentation, and disclosure of revenue in financial statements. Changes in
     accounting  to apply the guidance in SAB No. 101 may be accounted  for as a
     change in accounting  principle  effective January 1, 2000.  Management has
     not yet  determined  the  complete  impact of SAB No.  101 on the  Company;
     however,  management  does not expect that  application of SAB No. 101 will
     have a material effect on the Company's revenue  recognition and results of
     operations.

     In March 2000, the Financial  Accounting  Standards  Board ("FASB")  issued
     FASB Interpretation No. 44, "Accounting for Certain Transactions  Involving
     Stock  Compensation,"  (an  Interpretation  of Accounting  Principles Board
     Opinion  No. 25 ("APB 25"))  ("FIN  44").  FIN 44 provides  guidance on the
     application of APB 25, particularly as it relates to options. The effective
     date of FIN 44 is July 1, 2000,  and the  Company  has adopted FIN 44 as of
     that date.  The  Company  does not expect the  adoption of FIN 44 to have a
     material impact on its financial condition or results of operations.

(22) Subsequent Events

     Effective  March 12,  2001,  we entered into a  definitive  Settlement  and
     Mutual Release Agreement with Deutche Financial Services ("DFS"). Under the
     terms of the settlement Aura will pay to DFS $350,000 and 10,000,000 shares
     of Aura's common stock in exchange for mutual releases (see also note 16).


<PAGE>



(23) Extinguishment of Debt

     At the start of Fiscal 2000,  the Company had  $38,481,782  in  convertible
     notes payable,  of which most were in default.  During the current year the
     Company  restructured  much of its  convertible  notes  payable  obligation
     through debt forgiveness and equity conversion.  With the debt restructure,
     $11,009,102 of convertible  notes was converted into  71,054,445  shares of
     the Company's  common stock, of which 2,520,000 shares are not reflected as
     outstanding as of February 29, 2000. The Company also redeemed  $430,000 of
     convertible  notes, and $12,535,898 in convertible  notes and $5,850,168 in
     accrued  interest  were  forgiven.  The balance of these  notes  became non
     convertible  and are included in secured  notes  payable for the year ended
     February  29,  2000,  as  detailed  in  footnote  10.  A  majority  of  the
     restructure  was   accomplished  by  a  single  unrelated  party  acquiring
     $21,345,000 of the convertible  notes payable and  subsequently  converting
     $9,224,102  into 65,034,445  shares of the Company's  common stock and debt
     forgiveness of $12,120,898.  In addition,  $682,852 in accounts payable and
     accrued  expenses was also forgiven.  Total debt forgiveness of $19,068,918
     is  reflected as an  extraordinary  item in the  accompanying  consolidated
     financial  statements  and  resulted in  extraordinary  income per share of
     $0.15.

(24) Selected Quarterly Financial Data (unaudited)

     (amounts in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                          2001

                                        First           Second           Third            Fourth          Full Year
                                        -----           ------           -----            ------          ---------
<S>                                     <C>             <C>               <C>            <C>              <C>
Net Revenues:                           $ 382           $ 387             $ 502          $ 1,242          $ 2,513
                                        =====           =====             =====          =======          =======

Gross Profit:
  As reported on Form 10Q             $(2,133)        $(2,169)          $(1,881)           $ 679          $(5,504)
  Adjustment                            2,319           2,347             2,134             ----            6,800
                                        -----           -----             -----       ---   ----            -----
  Adjusted Report                       $ 186           $ 178             $ 253            $ 679          $ 1,296
                                        =====           =====             =====            =====          =======

Net loss                              $(2,610)        $(6,726)          $(4,653)         $(6,941)        $(20,930)
                                      ========        ========          ========         ========        =========
Net loss per Common Share               $(.01)          $(.03)            $(.02)           $(.02)           $(.08)
                                        ======          ======            ======           ======           ======
</TABLE>


<TABLE>
<CAPTION>

                                                                          2000

                                        First           Second           Third             Fourth         Full Year
                                        -----           ------           -----             ------         ---------
 Net Revenues:
<S>                                 <C>             <C>               <C>                  <C>         <C>
  As reported on Form 10Q             $ 2,581         $ 2,644           $ 1,090              $893        $ 7,208
 Impact of discontinued operations     (1,165)           (255)             ----              ----         (1,420)
                                    -- -------      ---- -----      ---    ----       --     ----       - -------
  Adjusted report                     $ 1,416         $ 2,389           $ 1,090              $893        $ 5,788
                                      =======         =======           =======              ====        =======

 Gross Profit:
 As reported on Form 10Q              $(2,065)          $(978)          $(1,952)             $335        $(4,660)
 Impact of discontinued                 1,620              21              ----              ----          1,641
    operations
 Adjustment                             1,657           2,492             2,700              ----          6,849
                                    --- -----       --- -----       ---   -----       --     ----       --------
 Adjusted report                      $ 1,212         $ 1,535             $ 748              $335        $ 3,830
                                      =======         =======             =====              ====        =======

 Loss before extraordinary item       $(5,487)        $(5,899)          $(4,190)         $(13,325)      $(28,901)
                                      ========        ========          ========         =========      =========
 Income from extraordinary item          ----            ----              ----          $ 19,069       $ 19,069
                                    ==== ====       ==== ====       ====   ====          ========       ========

 Net income (loss)                    $(5,487)        $(5,899)          $(4,190)          $ 5,744       $ (9,832)
                                      ========        ========          ========          =======       =========
 Net income (loss) per                  $(.05)          $(.06)            $(.04)             $.07          $(.08)
                                        ======          ======            ======      ===    ====          ======
   Common share
</TABLE>



Adjustment

In  Fiscal  2001,  the  Company   reclassified   certain  costs  that  had  been
characterized  as overhead costs and included in cost of sales.  These items are
primarily  engineering  and  facility  related and have now been  classified  as
engineering  expenses in the operating expense  category.  This has been done to
more accurately  reflect the actual cost of the product sold and provide a gross
profit  presentation based on the sale of product itself. This has resulted in a
change in the  reported  gross  margins for Fiscal 1999 and 2000 from a negative
143.1%  and  a  negative  131.9%  to a  negative  55.3%  and a  positive  66.2%,
respectively.



<PAGE>


                                   SCHEDULE II
                               AURA SYSTEMS, INC.
                                AND SUBSIDIARIES

                        Valuation and Qualifying Accounts

     Years ended February 28, 2001, February 29, 2000 and February 28, 1999

<TABLE>
<CAPTION>

                                     Balance at      Charged to       Charged to                        Balance at
                                     beginning of    costs and          other                             end
                                       period         expenses         Accounts1      Deductions        of period
                                     -----------------------------------------------------------------------------------

Allowances  are  deducted  from  the
assets to which they apply

Year ended February 28, 2001:
Allowance for:
<S>                                      <C>         <C>              <C>              <C>               <C>
    Uncollectible Accounts               $7,673,217  $    1,339,696    $          --       $8,852,913    $    160,000
    Reserve for returns                          --              --               --               --              --
    Reserve for potential product
    obsolescence                            326,936              --               --           35,532         291,404
                                         ----------         -------       ----------      -----------    --   -------
                                         $8,000,153      $1,339,696      $        --      $ 8,888,445    $    451,404
                                          =========       =========      ===========      ===========    ============

Year ended February 29, 2000:
Allowance for:
    Uncollectible Accounts             $  8,149,551   $     456,233   $            --     $   932,567      $7,673,217
    Reserve for returns                     121,474         359,488                --         480,962              --
    Reserve  for  potential  product
    obsolescence                          7,876,000          82,913                --       7,631,977         326,936
                                          ---------        --------      ------------       ---------      ----------
                                        $16,147,025   $     898,634   $            --      $9,045,506      $8,000,153
                                         ==========         =======   ===============      ==========       =========

Year ended February 28, 1999:
Allowance for:
    Uncollectible Accounts             $  5,431,525     $13,314,320      $10,000,000      $20,596,294    $  8,149,551
    Reserve for returns                     569,605      24,741,084               --       25,189,215         121,474
    Reserve  for  potential  product
    obsolescence                          4,535,000      15,906,337               --       12,565,337       7,876,000
                                          ---------      ----------     ------------       ----------       ---------
                                        $10,536,130     $53,961,741      $10,000,000      $58,350,846     $16,147,025
                                         ==========      ==========       ==========      ===========      ==========
</TABLE>



1 Amounts charged to other accounts  include amounts charged to price protection
and rebates in Fiscal 1999.