**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
  **Form
        10-K**
 (Mark
        One)
  **þ** **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF
        1934**
 
 For
        the
        fiscal year ended February 28, 2006
 OR
 
 **o
        TRANSITION REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
 For
        the
        transition period from ______________ to __________________
  Commission
        file number **0-17249**
  **AURA
        SYSTEMS, INC.**
 (Exact
        name of registrant as specified in its charter)
  **Delaware**
              **95-4106894**(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
  **2330
        Utah Avenue**
 **El
        Segundo, California 90245**
 (Address
        of principal executive offices)
  Registrant's
        telephone number, including area code: **(310)
        643-5300**
 Former
        name, former address and former fiscal year, if changed since last report:
  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 if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes  ̈ No x
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Exchange Act. Yes  ̈ No x
 
 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.  ̈
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated file, or a non-accelerated filer (as defined in Rule 12b-2 of
        the
        Act).
  Large
        Accelerated Filer  ̈ Accelerated Filer  ̈ Non-accelerated filer x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes  ̈ No x
  
  **APPLICABLE
        ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY** **PROCEEDINGS
        DURING THE PRECEDING FIVE YEARS:**
 
 I ndicate
        by check mark whether the registrant has filed all documents and reports
        required to be filed by Section 12, 13 or 15(d) of the Securities Exchange
        Act
        of 1934 subsequent to the distribution of securities under a plan confirmed
        by a
        court. Yes x No  ̈
  On
        August
        31, 2005 the aggregate market value of the voting stock held by non-affiliates
        of the Registrant was approximately $4.4 million. The aggregate market value
        has
        been computed by reference to the last trading price of the stock on August
        31,
        2005.
  On
        May
        31, 2006, the Registrant had 24,282,710 shares of common stock outstanding.
  2
  **TABLE
        OF CONTENTS**
  **PART
                  I**ITEM
                  1. BUSINESS
              
              5ITEM
                  1A. RISK FACTORS
              
              12ITEM
                  2. PROPERTIES
              
              12ITEM
                  3. LEGAL PROCEEDINGS
              
              16ITEM
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
              
              16ITEM
                  5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
                  AND
                  ISSUER PURCHASES OF EQUITY SECURITIES
              
              18ITEM
                  6. SELECTED FINANCIAL DATA
              
              19**PART
                  II**ITEM
                  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS
              
              26ITEM
                  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              
              26ITEM
                  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
              
              26ITEM
                  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND
                  FINANCIAL DISCLOSURE
              
              26ITEM
                  9A. CONTROLS AND PROCEDURES
              
              26ITEM
                  9B. OTHER INFORMATION**PART
                  III**ITEM
                  10. DIRECTORS AND EXECUTIVE OFFICERS
              
              28ITEM
                  11. EXECUTIVE COMPENSATION
              
              30ITEM
                  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS
                  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              
              31ITEM
                  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
              
              33ITEM
                  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
              
              33**PART
                  IV**ITEM
                  15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
              
              33SIGNATURES
              
              36
  3
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
  *This
        Report contains forward-looking statements within the meaning of the federal
        securities laws. Statements other than statements of historical fact included
        in
        this Report, including the statements under the headings “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations,”
“Business” and elsewhere in this Report regarding future events or prospects are
        forward-looking statements. The words “approximates,” “believes,” “expects,”
“anticipates,” “estimates,” “intends,” “plans” “would “should,” “may,” or other
        similar expressions in this Report, as well as other statements regarding
        matters that are not historical fact, constitute forward-looking statements..
        We
        caution investors that any forward-looking statements presented in this Report
        are based on the beliefs of, assumptions made by, and information currently
        available to, us. Such statements are based on assumptions and the actual
        outcome will be affected by known and unknown risks, trends, uncertainties
        and
        factors that are beyond our control or ability to predict. Although we believe
        that our assumptions are reasonable, they are not guarantees of future
        performance and some will inevitably prove to be incorrect. As a result,
        our
        actual future results may differ from our expectations, and those differences
        may be material. Accordingly, investors should use caution in relying on
        forward-looking statements to anticipate future results or
        trends.*
  *Some
        of the risks and uncertainties that may cause our actual results, performance
        or
        achievements to differ materially from those expressed or implied by
        forward-looking statements include the following:*
  · **
              *Our
                  ability to generate positive cash flow from
                  operations;*
 
 ·
              *Our
                  ability to obtain additional financing to fund our
                  operations;*
 
 ·
              *Our
                  business development and operating development;
                  and*
 
 · **
              *Our
                  expectations of growth in demand for our
                  products.*
  *We
        do
        not intend to update or revise any forward-looking statements, whether as
        a
        result of new information, future events or otherwise except to the extent
        required by law. You should interpret all subsequent written or oral
        forward-looking statements attributable to us or persons acting on our behalf
        as
        being expressly qualified by the cautionary statements in this Report. As
        a
        result, you should not place undue reliance on these forward-looking statements.*
  *References
        in this report to “we”, “us”, “the Company,” “Aura” or “Aura Systems”, includes
        Aura Systems, Inc. and its subsidiaries.*
  **WHERE
        YOU CAN FIND MORE INFORMATION**
  As
        a
        public company, we are required to file annual, quarterly and special reports,
        proxy statements and other information with the SEC. You may read and copy
        any
        of our materials on file with the SEC at the SEC’s Public Reference Room at 100
        F Street N.E., Washington, DC 20549. Our filings are available to the public
        over the Internet at the SEC’s website at http://www.sec.gov .
        Please
        call the SEC at 1-800-SEC-0330 for further information on the operation of
        the
        Public Reference Room. We also make available copies of our Forms 8-K,
        10-K, 10-Q, Proxy and Annual Report at no charge to investors through our
        website, http://www.aurasystems.com, as soon as reasonably practicable after
        filing such material with the SEC.
  4
  **PART
        I**
  **ITEM
        1. BUSINESS**
  **Introduction
        and History**
  We
        design, assemble and sell the AuraGen ® ,
        our
        patented mobile power generator that uses the engine of a vehicle to generate
        electric power. The AuraGen delivers on-location, plug-in electricity for
        any
        end use, including industrial, commercial, recreational and military
        applications. The AuraGen system consists of three primary subsystems (i)
        the
        patented axial design alternator, (ii) the Electronic Control Unit (“ECU”) and
        (iii) mounting kit that is a mechanical interface between the alternator
        and the
        automobile. Compared to the traditional solutions addressing the multi-billion
        dollar North American mobile power market (i.e., Gensets, traditional
        alternators, permanent magnet alternators dynamic and static inverters),
        we
        believe the AuraGen ® provides
        c(pure sine wave AC power as well as simultaneous DC power with greater
        reliability and flexibility at a lower cost to the end user. We began
        commercializing the AuraGen ® in late
        1999 as a 5,000-watt 120/240V AC machine compatible with certain Chevrolet
        engine models. In 2001, we added an 8,000 watt configuration and also introduced
        AC/DC and the Inverter Charger System (“ICS”) options. More recently we
        introduced a dual system that generates up to 16,000-watts of continuous
        power.
        We now have configurations available for more than 90 different engine types
        including a majority of General Motors and Ford models, some Daimler Chrysler
        models and numerous others engine models made by International, Isuzu, Nissan,
        Mitsubishi, Caterpillar, Detroit Diesel, Cummins, and Freightliner. More
        recently, a number of boats have had AuraGens installed for both government
        and
        recreational end-users.
  To
        date,
        AuraGen ® units
        have been sold in numerous industries, including recreational, utilities,
        telecommunications, emergency/rescue, public works, catering, oil and gas,
        transportation, government and the military. Our objective is to be the leading
        developer and supplier of fully integrated mobile electric power
        systems.
  We
        continue to hold several patents, in addition to those related to the
        AuraGen ® ,
        which
        we believe provide the basis for economically viable products in addition
        to the
        AuraGen ® ,
        but
        sales of the AuraGen ® currently provide  substantially
        all our operating revenues.
  Aura
        Systems, Inc. a Delaware corporation, was founded in 1987 and, until 1992,
        was
        primarily engaged in supplying defense related technologies for classified
        military programs . In
        1992
        we acquired the Electronic Ceramic Facility. This facility produced Piezo
        electric material that we required for our Actuated Mirror Array “AMA”
technology. In 1996 we licensed our AMA technology to Daewoo Electronics.
        During
        the same period we acquired Delphi Electronic Components who developed and
        built
        microelectronic circuits and components. In 1994 we started NewCom to
        manufacture and sale computer modems, sound cards and other multimedia
        components. By the mid 1990s the Company was organized into 4 divisions (i)
        AuraSound -producing and selling audio speakers based on a new and patented
        magnetic design, (ii) Aura Industrial & Automotive - developing numerous
        automotive and industrial related magnetic devices such as linear and rotary
        actuators with applications for variable valves, active suspension, actuators
        for many industrial machines, and the development of the AuraGen power system,
        (iii) NewCom- manufacturing and selling modems and computer multimedia kits,
        (iv) Aura display- using the AMA technology to develop very large very bright
        display systems. By 1998 the Company had 3 facilities in California, a facility
        in New Hope Minnesota, and facilities in Osaka Japan, Kuula Lumpur Malaysia,
        and
        New Dehli India. During the period the Company, was investing large capital
        into
        the development of the AuraGen.
  In
        1997
        the Company spun off NewCom as a public Company with Aura retaining
        approximately 60% of the stock. NewCom owed Aura approximately $40 million
        that
        was to be repaid by late 1998. In the summer of 1998, the computer industry
        experienced a significant slow-down and most original equipment manufacturers
        (“OEMs”), in order to revive their sales, introduced build - in modems and
        multi-media functions as an integral part of the computer. This caused severe
        pressure on NewCom’s operations. By early 1999, NewCom had ceased operations and
        closed down.
  During
        1999, the Company sold the Speaker operations, the Ceramic Operation, and
        Delphi. All activities on the AMA were stopped and the Company was totally
        focused on the completion of the AuraGen development and commercialization.Since
        fiscal 2002 sales of the AuraGen ® product
        have accounted for substantially all of our operating revenues.
  During
        fiscal 2002 through fiscal 2005, we substantially reduced our internal staffing
        due to the slower-than-anticipated level of AuraGen ® sales.
        We also suspended substantially all research and development activities.
        We
        continued to downscale our operations in fiscal 2005. However, the impact
        of the
        related cost reductions was insufficient to offset our extremely weak financial
        condition, which was worsened by late fees, penalties and transaction costs
        incident to financial defaults. In June 2005, we filed for protection under
        Chapter 11 of the Bankruptcy Code, and emerged on January 31, 2006 under
        a plan
        of reorganization.
  5
  **The
        AuraGen** **®**
  The
        AuraGen ® is
        composed of three basic subsystems. The first subsystem is the generator
        that is
        bolted to, and driven by, the vehicle's engine. The second subsystem, an
        electronic control unit, filters and conditions the electricity to provide
        clean, steady voltages for both AC and DC power. The third subsystem consists
        of
        mounting brackets and supporting components for installation and integration
        of
        the generator with the vehicle engine.
  The
        AuraGen is now available in three continuous power levels, (a) 5,000 Watts
        AC/DC, (b) 8,000 Watts AC/DC and (c) 16,000 Watts AC/DC.  All AC power are
        pure sine wave with total harmonic distortion  “THD” of less than 2.1% and
        are available in both 120 VAC and or 240 VAC.  In addition, the power
        generated on all models can be partitioned to provide simulations AC and
        14 or
        28 volts of direct current “DC” or only DC, if required by the user.  The
        AuraGen power levels can be generated while the vehicle is being driven or
        parked. The AuraGen/VIPER system includes as an option a complete power
        management system which monitors in real time (i) the batteries voltage and
        temperature, (ii) provides a partition of the power between AC and DC
        simultaneously with the ability to be programmed from all AC to all DC, (iii)
        monitors the RPM of the generator, (iv) monitors the temperatures of the
        generator and the ECU, (iv) monitors the raw power generated, (v) monitors
        both
        the AC and DC loads as to voltage and current, (vi) provides programming
        of load
        prioritization and load shedding, and (vii) monitors the voltage of the internal
        400VDC buss.
  We
        provide custom engineered brackets for our models that attach to over 90
        different engine and chassis models. We also provide power-take-off (PTO)
        and
        hydraulic driven interfaces for bigger trucks that do not involve direct
        attachment to the vehicle engine.
  **Mobile
        Power Industry**
  The
        mobile power generation market is large and growing. Vehicles used in the
        telecommunications, utilities, public works, construction, catering, and
        oil and
        gas industries, and emergency/rescue, military and recreational vehicles
        rely
        heavily on mobile power for their internal systems. In addition, mobile work
        sites require on-location electricity to power equipment ranging from computers
        to power tools.
  Based
        on
        studies conducted by the U.S. government, Business Communications Company,
        Inc.
        ("BCC") and others, we estimate the annual gross North American mobile power
        generation market in 2005 is at least $2.5 billion and growing. Worldwide
        growth
        is expected to be fueled by increases in the development and construction
        of
        industrial infrastructures, significant growth in homeland security
        expenditures, and increased use of sophisticated electronic equipment in
        underdeveloped areas where grid-based electricity is unavailable or unreliable.
        We also believe that mobile power has become increasingly important as backup
        to
        electric grid power supply.
  The
        traditional available solutions for mobile power users are:
  ·
              Gensets.
                  Gensets are standalone power generation units which are not incorporated
                  into a vehicle and require external fuel, either gasoline or diesel,
                  in
                  order to generate electricity. Gensets are generally (i) noisy
                  and
                  cumbersome to transport because of their weight and size, (ii)
                  they
                  typical run at constant speed to generate 50 or 60 Hz of AC power,
                  (iii)
                  must be operated at a significant part of the rated power to avoid
                  wet
                  staking, (iv) are significantly derated in the presence of harmonics
                  in
                  the loads and (v) require significant scheduled maintenance and
                  service.
                  Genset technology has been utilized since the 1950s.
  6
  ·
              High-Output
                  Alternators.
                  High-Output Alternators are traditionally found in trucks and commercial
                  vehicles and the vehicles engine is used as the prime mover. All
                  alternators provide their rated power at very high RPM and significantly
                  less power at lower RPM. In addition alternators are generally
                  only 30%
                  efficient at the low RPM range and increase to 50% efficiency at
                  the high
                  RPM range.The
                  power generated by alternators is 12 or 24 Volt DC and an inverter
                  is
                  required if 120 Volt AC power is needed. In addition, due to the
                  low power
                  output at low RPM, in order to get significant power, a throttle
                  controller is used to spin-up the engine.
  ·
              Invertersare devices that invert battery direct current to alternating current.
                  Inverters as mobile power generators are traditionally used in
                  low power
                  requirements, typically less than 2500 Watts, and do not have the
                  ability
                  to recharge the batteries used as the source of power. Thus typical
                  inverter users require other means to recharge the used batteries
                  such as
                  “shore-power” or gensets. More recently dynamic inverters became
                  available. Dynamic inverters use power from the alternator to augment
                  power from the batteries and are able to achieve power levels of
                  6,000
                  watts plus. The dynamic inverters introduce significant stresses
                  on both
                  the batteries and alternators that cause significant life shortening
                  for
                  both. Dynamic inverters use power from the alternator. When the
                  inverter
                  is turned on, the alternator is switched off from the vehicle battery
                  and
                  tied into a transformer that uses electronics controls to change
                  the DC
                  alternator inputs to AC inverter output. A separate transform winding
                  provides battery charging so fully regulated 120 Volt AC and 12
                  Volt DC
                  power is available as long as the engine is running at high enough
                  RPM to
                  provide power for the load and the battery charging. All dynamic
                  inverters
                  require a high output alternator to be able to output significant
                  AC
                  power. As is often the case, the limiting factor is the high output
                  alternator. In order to get stable output a very accurate throttle
                  controller is also needed to maintain steady speed on the engine.
  ·
              Permanent-Magnet
                  (“PM”) alternators.
                  Recently a number of companies have introduced alternators using
                  exotic
                  permanent magnets. These alternators tend to have higher power
                  generation
                  capabilities than regular alternators at lower engine RPM. In order
                  to be
                  practical in a under-the-hood environment (200oF)
                  one must add active cooling since the magnets are demagnetized
                  at
                  approximately (176oF).
                  There are other issues that require an active control system that
                  will add
                  and subtract magnetic field strength as the engine RPM
                  increases.
  ·
              Fuel
                  cellsare solid-state, devices that produce electricity by combining
                  a fuel
                  containing hydrogen with oxygen. They have a wide range of applications,
                  and can be used in place of the internal combustion engine and
                  traditional
                  lead-acid and lithium-ion batteries. So why aren't fuel cells being
                  installed everywhere? The most widely deployed fuel cells cost about
                  $4,500 perkilowatt.
 
 ·
              Batteries
                  convert stored chemical energy to electrical energy.
  **Competition**
  The
        industry in which we operate is competitive. The primary competition for
        the
        AuraGen ® are
        Gensets and there are approximately 44 Genset manufacturers in the United
        States. These competitors include: Onan, Honda and Kohler.
  There
        are
        many High Output Alternator manufacturers. Some of the better known ones
        are
        Delco-Remy, Bosh, Nippon Densu, Hitachi, Mitsubishi and Prestelite.
  There
        are
        many inverter manufacturers; some of the better-known ones are, Trace
        Engineering, Vanner, and Xentrex.
  Most
        of
        our competitors have greater financial, technical and marketing resources,
        have
        larger budgets for research, new product development and marketing and have
        long-standing customer relationships. We must also compete with many larger
        and
        more established companies in the hiring and retention of qualified personnel.
        In the past our financial condition has limited our ability to promote the
        AuraGen ® and make
        potential customers aware of its existence.
  7
  The
        AuraGen ® uses new
        technology and has only been available in the marketplace for a a number
        of
        years.. Because our product is radically different from traditionally available
        mobile power solutions, users may require lengthy evaluation periods in order
        to
        gain confidence in the product. Original equipment manufacturers ("OEMs")
        and
        large fleet users also typically require considerable time to make changes
        to
        their planning and production Because our limited financial and staff resources,
        we have focused our sales and marketing activities to a few industrial and
        military segments. In particular we focused on the US military including
        the
        USCG, homeland security agencies and emergency/rescue.
  More
        recently we expanded our focus and are now marketing to companies in the
        oil and
        gas segment, state and local governments in particular DOT, and recreational
        boating industry.
  **Competitive
        Advantages of the AuraGen** **®**
  We
        believe the AuraGen ® is a
        superior product due to its convenience, cost efficiency, fuel efficiency,
        reliability, flexibility in power output, and the quality of the electricity
        generated. The AuraGen is not sensitive to temperature or altitude variations
        and generates the rated power at or near idle engine RPM.
  The
        AuraGen ® does not
        require scheduled maintenance and is offered with a three year warranty compared
        to the typical one year warranty available for a Genset or
        inverter.
  In
        addition, the AuraGen ® is
        significantly cleaner for the environment than gensets, the other generally
        available mobile power solutions. The AuraGen ® uses the
        automotive engine which is highly regulated for environmental protection.
        Gensets use small engines that produce significantly higher levels of emissions
        per unit of power output than the automobile engine.
  We
        believe that barriers to entry make it less likely that a product superior
        to
        the AuraGen ® will
        become available in the foreseeable future. The inventions upon which the
        AuraGen ® is based
        are protected by patents issued by the U.S Patent office. To our knowledge,
        there are no other patents for axial induction machines with solid rotors.
  Manufacturers
        and end users of mobile power solutions (including the military) typically
        require completion of extensive evaluation and approval processes before
        embracing new systems. After extensive testing, a number of Federal, state,
        DOT
        departments, and some r industrial companies have approved the
        AuraGen ® for
        purchase.
  Thousands
        of AuraGen ® units
        are currently being used for multiple applications and in all types of operating
        environments, providing a good sample set for reliability analysis. The results
        show very low failure rates, which we are reducing further via minor hardware
        and software modifications, better assembly procedures and improved installation
        training. The U.S. Army has performed its own tests and is continuing to
        test
        the AuraGen ® under
        severe conditions. The VIPER (the name for the military version of the
        AuraGen ® ),
        in use
        by Special Operations and other combat forces, has been air-drop-certified
        by
        the Army and has been and is successfully deployed in Operation Enduring
        Freedom
        and Operation Iraqi Freedom.
  The
        AuraGen ® system
        passed all of the UL testing in 2002 and 2003. In late 2004 early 2005, the
        USMC
        core successfully tested the AuraGen/VIPER for safety and other operational
        capabilities at the Aberdeen Test grounds..
  **Target
        Markets**
  When
        the
        Company emerged from Chapter 11 reorganization under new management, the
        sales
        and marketing activities were expanded and now include:
  Military,
        Homeland Security Administration and Other Federal Agencies
  We
        believe the VIPER (the military version of the AuraGen ® )
        is a
        superior mobile power solution compared with existing alternatives for numerous
        military applications. The VIPER capability to produce both 120 Volt AC and
        28
        Volt DC power simultaneously at low engine RPM is critical for many military
        applications. In addition the power management system which is inherited
        in the
        VIPER provides the military users with the ability to monitor, the quality
        and
        quantity of available power, the state of the on board batteries, and the
        ability to prioritize different electric loads. The USCG after 3 years of
        testing selected the VIPER as the power system for its 190 new patrol boats;
        SAIC is using the VIPER on all of its VACIS gamma ray scan systems that are
        used
        for homeland and base security applications, numerous units of special forces
        and regular army are using the VIPER in both Iraq and Afghanistan, The DOD
        report to congress in August 2006 discussed the success of the VIPER in Iraq
        and
        Afghanistan. More recently a number of military OEMs are exploring the use
        of
        the VIPER for the MRAP, MMPV and similar military programs. The Company is
        also
        pursuing marketing the VIPER for the upcoming JLTV program.
  8
  Marine
  We
        believe that the AuraGen is an ideal product for the recreational boating
        in the
        25-50 ft range. The National Oceanic and Atmospheric Administration “NOAA”
tested the AuraGen on the “Magna Spirit” for 3,000 miles on the open oceans and
        reported flawless performance. The USCG tested the VIPER for 3 years before
        choosing it to power the 190 new patrol boats. Both of these organizations
        are
        the leaders in introduction of new technologies and safety for marine
        applications. More recently a major boat OEM successfully tested the AuraGen
        on
        one of their production boats and the Company is currently pursuing the required
        boat related certifications from UL. While the Company is not expecting any
        delays in getting the required certification, no assurances can be given
        as to
        when such required certification will be completed.
  Oil
        and Gas industry
  The
        oil
        and gas industry are heavy users of mobile power for service. We have identified
        a number of oil and gas service providers that require the power level as
        well
        as the power quality generated by the AuraGen. In particular the need for
        very
        large power to start inductive loads such as compressors, fans and electric
        motors. Typically the starting power required is knows as lock rotor and
        can
        easily go as high as 30,000 watts. The AuraGen ICS design and architecture
        is
        such that it can easily support these power levels for very short times that
        are
        required to start the loads. We have demonstrated 30,000 watts starting power
        for numerous compressors and motors.
  Mid
        size Refrigeration Trucks.
  Mid
        size
        refrigeration trucks are used throughout the country for the delivery of
        food.
        These trucks typically have a diesel engine mounted over the cab that is
        used as
        a generator for the refrigeration unit. The AuraGen is an ideal power source
        that can eliminate the need for the extra diesel engine thus reducing operating
        cost and fuel costs. The AuraGen ability to provide large start-up power
        is
        critical for this application since a typical refrigeration system requires
        a
        2-4 horsepower compressor. Such compressors require 20,000-30,000 watts of
        starting power. The Company has now sold over 100 systems for this application
        and is anticipating significant growth in this segment.
  Emergency/Rescue
  The
        emergency/rescue market relies heavily upon mobile power for lights,
        communications gear, instruments, medical equipment and digital equipment
        and
        tools. As the emergency/rescue market has undergone a transition to digital
        equipment and portable computers, it has experienced constant growth in mobile
        power needs. Approximately 20 organizations have started to use the
        AuraGen ® .
        Recently the Red Cross has used the AuraGen to power their communication
        needs
        in support of disaster relief during hurricane Katrina and the wild fires
        in
        California in October 2007. In addition, hundreds of fire trucks are now
        using
        the AuraGen as their mobile power source.
  **Facilities,
        Manufacturing Process and Suppliers**
  As
        of
        February 28, 2006, we assembled and tested the AuraGen ® at our
        27,000 square foot facility in El Segundo, California with components which
        are
        produced by various suppliers. We established these facilities with a maximum
        production capacity of 1,000 units per month.
  9
  Early
        in
        our AuraGen ® program,
        we determined it was most cost-effective to outsource production of components
        and subassemblies to volume-oriented manufacturers, rather than produce these
        parts in house. As a result of this decision, and based on then anticipated
        sales, we purchased, prior to fiscal 2001, a substantial inventory of components
        and subassemblies at volume prices.. Since sales did not meet such expectations,
        we have been assembling, testing and selling product from this inventory
        for
        several years. Many of the components and subassemblies are mechanical in
        nature, do not deteriorate and are readily usable for all of our AuraGen
        models.
        Some of the subassembly are in the form of electronic control units that
        have
        also not deteriorated and, even though there have been improvements and
        modifications over this period, the units in inventory required only minor
        applications of parts and labor to bring them to current specifications.
  From
        fiscal 2002 through fiscal 2005, we substantially reduced our internal staffing
        to be more appropriate to the slower-than-anticipated level of sales. We
        also
        suspended substantially all research and development activities. Since the
        emergence from Chapter 11 reorganization in February 2006, we have begun
        to
        increase our research and development efforts.
  In
        order
        to renew our inventory of components, we will need to renew contracts with
        such
        manufacturers or locate other suitable manufacturers. Since February 2006,
        the
        Company has renewed its relationships with a number of its old suppliers
        and is
        developing new relationships with others. To ensure quality and reliability
        in
        the field, we use highly qualified suppliers, the majority of which are ISO
        9002
        compliant.
  We
        provide a turnkey product and service to support our customers in every area.
        We
        have performed all of the development, from basic physics to detailed
        engineering. We believe our core capabilities provide a solid foundation
        to
        resolve technical issues, develop an ongoing line of new products and
        continually enhance our products.
  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 ® to allow
        its use with other mobile drives, such as hydraulic systems and Power Take
        Off
        ("PTO") applications.
  **Research
        and Development**
  From
        fiscal 2002 through fiscal 2005, we suspended substantially all research
        and
        development activities due to our weakened financial condition. Accordingly,
        during the fiscal years ended February 28, 2005 and February 29, 2004, our
        expenditures for research and development ("R&D") activities were
        negligible. Although we believe that ongoing R&D is important to the success
        of our product in order to utilize the most recent technology, to develop
        additional products and additional uses for existing products, and to stay
        current with changes in vehicle manufacture and design and to maintain an
        ongoing advantage over potential competition, our financial condition has
        not
        allowed significant expenditures on R&D as all costs are being minimized
        while we seek to maintain solvency and attain profitability.
  In
        February 2006, when the Company emerged from Chapter 11 reorganization, we
        started to rebuild our research and development team. We have introduced
        and
        begun to ship our dual and Tamgen systems that generate up to 16,000 watts
        of
        continuous power with both AC and DC simultaneous capabilities. We have
        completed the design, and are currently testing, a unit that is one third
        smaller than the current 5,000 and 8,000 watt systems that will supply 3,000
        to
        4,000 watts. We are also pursuing the development of a larger unit that we
        expect to have 25,000 watts capability.
  **Patents
        and Intellectual Property**
  Our
        Intellectual Property portfolio consists of trademarks, proprietary know-how
        and
        patents.
  Utilizing
        electromagnetic technology we developed numerous magnetic systems and designs
        that result in a significant increase of magnetic field density per unit
        volume,
        that can be converted into useful power energy or work. This increase in
        field
        density is a factor of 3 to 4 which, when incorporated into mechanical devices,
        could result in a significant reduction in size and cost for the same
        performance, in a given application.
  10
  The
        applications of these technological advances are found in mechanical machines
        used every day by industrial, commercial and consumer users. We have applied
        this technology in numerous applications in industrial machines such as
        generators, motors, actuators and linear motors.
  The
        U.S.
        Patent Office awarded us 29 Patents applicable to automotive and industrial
        applications. Of the above patents, four (4) are focused directly on the
        AuraGen, seven (7) are basic magnetic actuation, two (2) are for control
        systems
        associated with controlling the magnetic fields in different configurations
        and
        sixteen (16) are focused on the EVA application.
  The
        sixteen (16) patents associated with EVA cover the implementation of a
        controlled magnetic field as applied to linear motors. Many of the same
        techniques are implemented into the AuraGen control and in particular, the
        control of the high power board used in the new AuraGen inverter mode, which
        uses many elements from the EVA system.
  Areas
        of
        AuraGen Technology Innovation
  Patents:
        5,734,217; 6,157,175; 6,700,214; 6,700,802; with expiration dates of 2015,
        2017,
        2019 and 2019 respectively. The above patents cover three areas as described
        below.
  1-
        Induction Machine-
  The
        basic
        patent covers a new form of induction machine with superior performance in
        a
        much smaller size than conventional machines. The solid cast rotor, the shaped
        magnetic field, the secondary conduction path through the steel and the axial
        magnetic orientation is a key component of this innovation.
  2-
        Control Systems
  The
        control system separates the power generation from the power delivery by
        introducing a 400 VDC bus. For each cycle of each phase part of the cycle
        power
        is drawn from the bus to run the electronics and energize the coils while
        during
        the other part of the cycle power is delivered to charge up the bus. The
        control
        system must balance all the timing to effect zero voltage change to the bus
        under dynamic variations of frequency and loads. The ability to optimize
        in real
        time the slip frequency is a key innovation in motor and generator control
        for
        variable speed variable frequency and variable load systems.
  3-
        Bi-Directional Power Supply (BDP)
  The
        patented ICS system developed by Aura provides a new capability in power
        systems. The BDP allows a system with simultaneous multi sources for power.
        It
        is a key component in providing the ability to deliver both AC and DC power
        simultaneously as well as the ability to handle large power surges without
        the
        need for a throttle controller.
  **Employees**
  As
        of
        February 28, 2006, we employed 29 persons. We have reduced our workforce
        significantly in the two years ended February 28, 2006, in order to conserve
        cash. We are not a party to any collective bargaining agreements.
  **Significant
        Customers**
  During
        the year ended February 28, 2006, we conducted business with four customers
        whose sales comprised 24% of net sales. As of February 28, 2006, two customers
        accounted for 87% of net accounts receivable.
  **Backlog**
  We
        had no
        material backlog as of the end of the 2005 and 2006 fiscal years.
  11
  **ITEM
        1A. Risk Factors**
  **Risk
        Factors Relating to Our Business**
  ***We
        have a history of losses and we may not be profitable in any future
        period.***
  In
        each
        fiscal year since our organization in 1987 we have not made an operating
        profit.
        We have an accumulated deficit in excess of $300 million from our inception
        through February 28, 2006. We cannot assure you that we will be able to achieve
        or maintain profitability or positive cash flow.
  ***If
        we are unable to raise capital, our ability to implement our current business
        plan and ultimately our viability as a company could be adversely
        affected.***
  The
        cash
        flow generated from our operations to date has not been sufficient to fund
        our
        working capital needs, and we cannot predict when operating cash flow will
        be
        sufficient to fund working capital needs. Since fiscal 2002 we were forced
        to
        scale back operations due to inadequate working capital and in June 2005
        we were
        forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code,
        from
        which we emerged under a court-approved plan of reorganization on January
        31,
        2006.
  In
        the
        past, in order to maintain liquidity we have relied upon external sources
        of
        financing, principally equity financing and private and bank indebtedness.
        We
        have no bank line of credit and require additional debt or equity financing
        to
        fund ongoing operations. We are seeking to raise additional capital. However,
        we
        have no firm commitments from third parties to provide additional financing
        and
        we cannot assure you that financing will be available at the times or in
        the
        amounts required. The issuance of additional shares of equity in connection
        with
        such financing could dilute the interests of our existing stockholders, and
        such
        dilution could be substantial. If
        we
        cannot raise needed funds, we would also be forced to make further substantial
        reductions in our operating expenses, which could adversely affect our ability
        to implement our current business plan and ultimately our viability as a
        company.
  ***Our
        revenues have declined significantly in recent years.***
  We
        have
        experienced a significant decline in operating revenues since fiscal 1998.
        Our
        net revenues peaked at approximately $104 million in the fiscal year ended
        February 29, 1998, prior to commercial sales of the AuraGen ® .
        Revenues declined to $2.5 million for the fiscal year ended February 2001.
        The
        decline in revenues was due primarily to the cessation of operations of our
        computer peripherals subsidiary, NewCom, Inc., in fiscal 1999 and the sale
        of
        our speaker operations, electronic component operations, and ceramics
        operations. Substantially all of our operating revenues are now derived from
        the
        sale of our AuraGen products, which did not produce a material amount of
        revenues until the fourth quarter of our fiscal year ended February 2001.
        Since
        fiscal 2001, annual operating revenues have ranged between $1.1 million and
        $3.1
        million. We expect that substantially all of our operating revenues will
        continue to be derived from AuraGen sales for the foreseeable
        future.
 
 ***Our
        auditors have qualified their reports on our financial statements to indicate
        that there is substantial doubt as to our ability to continue as a going
        concern, which could adversely affect our ability to obtain third party
        financing.***
 
 Our
        auditors, Kabani & Co., have qualified their reports on the financial
        statements for the fiscal years ended February 28, 2005 and 2006, to indicate
        that there is "substantial doubt" about our ability to continue as a going
        concern. These opinions are based upon our continuing losses from operations.
        The existence of the going concern qualification could affect our ability
        to
        obtain financing from third parties or could result in increased cost of
        this
        financing.
  Our
        continued existence will require that we generate sufficient cash flow from
        operations or obtain necessary capital from outside sources. As indicated
        elsewhere in this report, to date we have been unable to achieve profitability
        and our financial success is dependent upon the success of our
        AuraGen ® line of
        products. Our ability to achieve profitability will depend upon a number
        of
        factors, many of which we do not control, including successful marketing
        and
        sales of the AuraGen ® line of
        products. Until we are able to generate sufficient cash flow from our
        operations, we will be dependent on external sources of funding, such as
        the
        sale of equity, favorable vendor payment terms and debt financing. These
        sources
        of funding may not be available when we require them, or they may not be
        available in amounts sufficient to sustain our operations.
  12
  ***Our
        success over the short-term depends on the commercial success of the
        AuraGen*** ***®*** ***products, as we are not currently engaged in any other line of
        business.***
  Because
        we have focused our business on developing a single product line, rather
        than on
        diversifying into other areas, our success in the foreseeable future will
        be
        dependent upon the commercial success of the AuraGen ® product
        line.
 
 ***We
        may have difficulty managing our growth.***
 
 We
        restructured our operation during fiscal 2004, 2005 and 2006 in order to
        conserve cash. Our workforce declined from 101 employees as of February 28,
        2002
        to 47 at February 28, 2007. We will need to hire employees, rebuild our sales
        and production infrastructure and improve our operating and financial systems
        in
        order to effectively manage any significant growth in demand for our products.
        If we do not effectively manage our growth, we will not be successful in
        executing our business plan, which could materially adversely affect our
        business, results of operations and financial condition.
  ***The
        market acceptance of the AuraGen*** ***®*** ***is uncertain.***
  Our
        business is dependent upon sales generated from the AuraGen ® family
        of products and increasing acceptance of these products. We cannot assure
        you
        that our products will achieve broad acceptance in the marketplace. The
        AuraGen ® uses new
        technology and has only been available in the marketplace for a few years.
        Our
        financial condition has limited our ability to market the AuraGen ® to
        potential customers. Because our product is radically different from
        traditionally available mobile power solutions, users may require lengthy
        evaluation periods in order to gain confidence in the product. Original
        equipment manufacturers ("OEMs") and large fleet users also typically require
        considerable time to make changes to their planning and production.
  ***Our
        business may be adversely affected by industry
        competition.***
  The
        industry in which we operate is competitive. We face substantial competition
        from companies that have been offering traditional solutions such as gensets
        (portable generators) for the last 50 years, and there are more than 40 genset
        manufacturers in the United States. These competitors include: Onan, Honda
        and
        Kohler.
  Most
        of
        our competitors have greater financial resources, have larger budgets for
        research, new product development and marketing and have long-standing customer
        relationships. We must compete with many larger and more established companies
        in the hiring and retention of qualified personnel.
  Moreover,
        this market may attract new competitors that have longer operating histories,
        greater name recognition, and significantly greater financial, technical
        and
        marketing resources than our company. Our failure to meet our projections
        for
        our products’ market acceptance or the ability of our competitors to capture a
        first mover advantage could have a material adverse impact upon our business,
        operating results and financial condition. Furthermore, new product
        introductions or product enhancements by our current or future competitors
        or
        the use of other technologies could cause a loss of market acceptance of
        our
        products.
  ***We
        depend on our intellectual property to provide us with a competitive
        advantage.***
  We
        rely
        on a number of patents and patent applications to protect the
        AuraGen ® products
        from unauthorized competitors. Our
        efforts to protect our proprietary rights may not succeed in preventing
        infringement by others or ensure that these rights will provide us with a
        competitive advantage. We
        cannot
        assure you that the patents pending relating to the AuraGen ® system
        or future patent applications will be issued or that any issued patents will
        not
        be invalidated, circumvented or challenged. A portion of our proprietary
        technology depends upon trade secrets and unpatented technology and proprietary
        knowledge related to the development, promotion and operation of our products.
        While we generally enter into confidentiality agreements with our employees,
        consultants and vendors, we cannot assure you that our trade secrets and
        proprietary technology will not become known or be independently developed
        by
        competitors in such a manner that we have no practical recourse, nor can
        there
        be any assurance that others will not develop or acquire equivalent expertise
        or
        develop products which render our current or future products noncompetitive
        or
        obsolete.
  13
  Litigation
        regarding intellectual property rights could be time-consuming and expensive
        and
        could divert our technical and management personnel. We cannot assure you
        that
        such litigation expenses will not be incurred in the future. There also can
        be
        no assurance that other parties will not take, or threaten to take, legal
        action
        against us, alleging infringement of such parties' patents by our current
        or
        proposed products. We cannot assure you that we will have adequate financial
        resources to successfully institute or defend intellectual property litigation.
        Insurance coverage to indemnify us against liability for infringement of
        other
        parties' intellectual property rights is either unavailable or prohibitively
        expensive.
  ***We
        depend on the expertise of key employees.***
  Because
        our product depends on patented and proprietary technology and must be
        periodically modified to adapt the product to changes in engine design and
        new
        operational requirements, we depend on a limited number of key employees
        with
        experience in electromagnetic theory and design.
  Competition
        for key employees is intense, and we cannot assure you that we will be able
        to
        retain our key employees or that it will be able to attract, assimilate and
        retain other highly qualified personnel in the future. While we may enter
        into
        agreements with its employees regarding patents, confidentiality and related
        matters, we not generally have employment agreements with our employees.
        The
        loss of key personnel, especially without notice, or the inability to hire
        or
        retain qualified personnel, particularly given our anticipated growth, could
        have a material adverse effect on our business, operating results and financial
        condition.
  ***We
        depend on third party manufacturers for certain product
        components.***
  We
        rely
        extensively on subcontracts with third parties for the manufacture of most
        components of the AuraGen ® .
        If
        these providers do not produce these products on a timely basis, if the products
        do not meet our specifications and quality control standards, or if the products
        are otherwise flawed, we may have to delay product delivery, or recall or
        replace unacceptable products. In addition, such failures could damage our
        reputation and could adversely affect our operating results. As a result,
        we
        could lose potential customers and any revenues that we may have at that
        time
        may decline dramatically.
  Although
        we generally use standard industrial and electrical parts and components
        for our
        products, some of our components are currently available only from a single
        source or from limited sources. We may experience delays in production of
        the
        AuraGen ® if we
        fail to identify alternate vendors or if any parts supply is interrupted
        or
        reduced, or if there is a significant increase in production costs or decline
        in
        component quality.
  ***We
        will need to renew sources of supply to meet increases in demand for the
        AuraGen*** ***®*** ***.***
  We
        purchased the basic components for the AuraGen ® units
        currently being sold under a bulk order placed prior to fiscal 2001. Due
        to
        sales not meeting anticipated levels, we have been selling from this inventory.
        In order to renew this inventory, we will need to renew contracts with such
        manufacturers or locate other suitable manufacturers. Although we believe
        that
        there are a number of potential manufacturers of the components, we cannot
        assure you that renewed contracts for components can be obtained on favorable
        terms. Any material adverse change in such contracts could increase our cost
        of
        goods.
  **Risks
        Relating to Our Common Stock**
 
 ***Because
        our operating results have been uneven and may continue to fluctuate, this
        could
        affect our stock price.***
 
 Because
        our efforts since 1999 have been focused entirely on the introduction of
        the
        AuraGen ® family
        of products into the marketplace, our revenues and operating results have
        been
        uneven and may continue to be so during our current fiscal year and beyond.
        These fluctuations could affect our stock price. Factors which could affect
        our
        operating results include:
 
 14
 ·The
        size, timing and shipment of individual orders;
  ·Market
        acceptance of our products;
  ·Development of direct and indirect sales channels; and
  ·
        The timing of introduction of new
        products or enhancements.
 
 ***We
        have a history of filing late periodic reports with the
        SEC.***
 
 In
        June
        1999 we failed to file our annual report on Form 10-K on the due date prescribed
        by the SEC as we were unable to complete the audit of our financial statements.
        This in turn delayed the filing of three subsequent quarterly reports on
        Form
        10-Q. The delay was occasioned by inadequate financial resources brought
        about
        by severe financial difficulties of our computer peripherals subsidiary,
        NewCom,
        Inc., which ceased operations in the first quarter of 1999. As a result of
        the
        delinquent filings our common stock was delisted from the Nasdaq National
        Market
        in July 1999. In February 2000 we completed our financial restructuring and
        filed all delinquent SEC reports, and listed on the NASD, Inc. OTC Bulletin
        Board (“OTCBB”). From February, 2005 through January 2008, we failed to timely
        file quarterly reports on Form 10-Q and Annual Reports on Form 10-K. This
        delay
        was also occasioned by inadequate financial resources, culminating in our
        filing
        for reorganization under Chapter 11 of the U.S. Bankruptcy Code in June 2005.
        As
        a result of our failure to file these reports we were delisted from the OTCBB
        in
        July, 2005 and currently trade on the “pink sheets.” Following our emergence
        from bankruptcy in January 2006 we engaged auditors and other professionals
        to
        assist in the preparation of delinquent SEC filings. As of the date of filing
        of
        this report, all of our delinquent filings have been made and we are now
        eligible for re-listing on the NASD, Inc. OTCBB. However, we cannot assure
        you
        that our common stock will be listed. Continued listing on the OTCBB and
        other
        U.S. exchanges requires that we timely file periodic SEC reports. Our failure
        to
        remain timely, therefore, could result in the delisting of our common stock
        on
        the OTCBB should we again become listed, which in turn could adversely affect
        the market liquidity of our common stock.
 
 ***We
        may issue additional shares of our authorized common stock without obtaining
        the
        approval of our stockholders.***
 
 As
        of the
        date of this report, our corporate charter currently authorized our Board
        of
        Directors to issue up to 50,000,000 shares of common stock, of which 36,670,820
        shares were outstanding as of January 31, 2008. The power of the Board of
        Directors to issue authorized shares of common stock is generally not subject
        to
        stockholder approval under Delaware state law, the state of our corporate
        organization. Any additional issuance of our common stock may have the effect
        of
        further diluting the equity interest of stockholders, and such dilution could
        be
        substantial.
 
 ***Because
        our common stock is not traded on Nasdaq or a national or regional market,
        liquidity for our common stock could be adversely
        impacted.***
 
 Effective
        July, 2005, our common stock was delisted from the OTCBB. As a result, an
        investor may find it more difficult to dispose of or to obtain accurate price
        quotations and volume information concerning our common stock than if it
        were
        listed on the OTCBB, the Nasdaq Stock Market or a national or regional
        exchange.
 
 ***Because
        our common stock is subject to rules governing low priced securities, market
        liquidity for our common stock could be adversely
        impacted.***
 
 Our
        common stock trades below $5.00 per share and is not listed on the Nasdaq
        Stock
        Market or a national or regional securities exchange. Therefore, our common
        stock is subject to the low priced security or so-called "penny stock" rules
        that impose additional sales practice requirements on broker-dealers who
        sell
        such securities to persons other than established customers and accredited
        investors. For any transaction involving a penny stock, unless exempt, the
        rules
        require, among other things, the delivery, prior to the transaction, of a
        disclosure schedule required by the Securities and Exchange Commission relating
        to the penny stock market. These rules also require that the broker determine,
        based upon information obtained from the investor, that transactions in penny
        stocks are suitable for the investor, and require the broker to obtain the
        written consent of the investor prior to effecting the penny stock transaction.
        The broker-dealer must also disclose the commissions payable to both the
        broker-dealer and the registered representative, current quotations for the
        securities and, if the broker-dealer is the sole market-maker, the broker-dealer
        must disclose this fact and the broker-dealer's presumed control over the
        market. Finally, monthly statements must be sent disclosing recent price
        information for the penny stock held in the account and information on the
        limited market in penny stocks. So long as our common stock is characterized
        as
        a penny stock, the market liquidity for these shares could be severely affected.
        The regulations relating to penny stocks could limit the ability of
        broker-dealers to sell these securities and, in turn, the ability of
        stockholders to sell their shares in the secondary market.
  15
  ***The
        potential exercise of outstanding warrants and options could adversely affect
        the market price of our common stock, dilute the holdings of existing
        stockholders and impede our ability to obtain additional equity financing.***
  As
        of
        December 31, 2007 we had outstanding 5,855,126 options and warrants to purchase
        our common stock at exercise prices ranging between $2.00 and $3.50, and
        commitments to issue an additional 2,506,050 options at exercise prices ranging
        between $2.00 and $3.00 upon shareholder approval of these issuances. If
        those
        option and warrant holders exercise these securities, we will be obligated
        to
        issue additional shares of common stock at the stated exercise price. As
        of
        March 3, 2008, the closing price of our common stock was $1.72per share.
        The
        existence of such rights to acquire common stock at fixed prices may prove
        a
        hindrance to our efforts to raise future equity funding, and the exercise
        of
        such rights will dilute the percentage ownership interest of our stockholders
        and may dilute the value of their ownership. Future sale of shares issuable
        on
        the exercise of outstanding warrants and options at fixed prices below
        prevailing market prices, or expectations of such sales, could adversely
        affect
        the prevailing market price of our common stock, particularly since such
        warrants or options may be exercised at a fixed price and resold. Further,
        the
        holders of the outstanding warrants may exercise them at a time when we would
        otherwise be able to obtain additional equity capital on terms more favorable
        to
        us.
  ***We
        do not expect to pay dividends on our common stock in the foreseeable future.***
 
 Although
        our stockholders may receive dividends if, as, and when declared by our board
        of
        directors, we do not presently intend to pay dividends on our common stock
        until
        we are able to generate revenues and profits on a sustained basis and available
        cash exceeds our working capital requirements. Therefore, you should not
        purchase our common stock if you need immediate or future income by way of
        dividends from your investment.
  **ITEM
        2. PROPERTIES**
  As
        of
        February 28, 2005, our majority owned subsidiary, Aura Realty, Inc. (“Aura
        Realty”), owned the 47,000 square foot headquarters facility and adjacent 27,690
        square foot manufacturing facility in El Segundo, California that we use
        for our
        AuraGen ® product.
        These properties were encumbered by a deed of trust securing a note in the
        original principal amount of $5.4 million.
  During
        fiscal 2003, we sold a minority interest in Aura Realty. During fiscal 2004,
        we
        defaulted on payments under the note secured by our headquarters and
        manufacturing facilities. Such default continued past year-end and the lender
        took actions regarding a possible foreclosure sale. In June 2004, we paid
        all
        arrearages, cured this default and were current on our obligations under
        the
        note as of June 30, 2005.
  In
        December 2005, Aura Realty sold the two buildings to an unrelated third party.
        We then leased the smaller facility and moved out of the headquarters facility.
        Effective December 31, 2007, our current lease expired and we are currently
        on a
        month-to-month lease. In February 2008, we entered into a lease for a new
        facility of approximately 25,500 square feet, near our current facility.
        The
        lease is for a term of five years, commencing May 1, 2008, and carries a
        base
        rent of $28,019 per month. We feel this facility is sufficient for our current
        needs.
  **ITEM
        3. LEGAL PROCEEDINGS**
  **Chapter
        11 Reorganization of Aura Systems, Inc.**
 
 On
        June
        24, 2005, we filed for reorganization under Chapter 11 of the U.S. Bankruptcy
        Code in the United States Bankruptcy Court, Central District of California,
        (Case Number LA 05-24550-SB). The filing of the bankruptcy proceeding acted
        as
        an automatic stay of all pending litigation as of the filing date without
        further approval of the Bankruptcy Court. The Company continued its day-to-day
        business operations as a “debtor-in-possession” under the jurisdiction of the
        Bankruptcy Court and in accordance with the applicable provisions of the
        Bankruptcy Code until it emerged from Chapter 11 under a Plan of Reorganization
        effective January 31, 2006.
  16
 
 For
        information regarding material developments in these proceedings for the
        quarter
        ended February 28, 2006, including the terms of the Plan of Reorganization
        which
        became effective on January 31, 2006, see “Management’s Discussion and Analysis
        of Financial Condition and Results of Operations - Liquidity and Capital
        Resources.”
 
 **Ben
        Moshe and Maimon Litigation**
  Following
        the commencement of our Chapter 11 bankruptcy proceeding in June 2005 we
        filed a
        suit against Yair Ben Moshe and David Maimon (United States Bankruptcy Court,
        Central District of California, (Case Number LA 05-24550-SB) to enforce their
        subscription obligations for Series B Preferred stock and they in turn filed
        countersuits against us claiming monetary damages from a failed real estate
        transaction involving our Alaska Avenue headquarters facility. All of the
        parties’ claims were resolved as part of a settlement agreement entered into by
        the parties, including us, Yair Ben Moshe ("Moshe"), David Maimon ("Maimon"),
        Adi Harari, Izar Fernbach, Fred Balitzer, and ZD Products, Inc. ("ZD"), and
        incorporated into the Plan of Reorganization.
 
 The
        following sets forth some of the key terms of the Settlement
        Agreement:
 
 ·
              General
                  unsecured claims against us of $244,000, $956,041 and $1,426,915
                  filed by
                  Harari, Maimon and Moshe were reduced to a single allowed general
                  unsecured claim in the aggregate amount of $590,000 (the "Allowed
                  Claim").
 
 ·
              ZD
                  agreed to purchase the Allowed Claim from Maimon and Moshe for
                  $225,000,
                  of which $150,000 was paid directly to Maimon and Moshe, and $75,000
                  was
                  contributed towards the $3,045,000 equity infusion which was part
                  of the
                  Plan (the “New Money
                  Contribution”).
 
 ·
              We
                  assigned to Maimon and Moshe $225,000 that we were to receive from
                  the
                  sale proceeds from Aura Realty, Inc.’s sale of its real property interests
                  in December 2005. Maimon and Moshe, in turn, agreed to contribute
                  this
                  $225,000 towards the $3,045,000 New Money Contribution.
 
 ·
              Maimon
                  and Moshe have agreed to a release of the $3,738,000 unsecured
                  claim that
                  they filed against Aura Realty, Inc. in its Chapter 11 bankruptcy
                  case.
 
 ·
              Maimon
                  and Moshe agreed that all of the stock interests that they never
                  paid for,
                  as well as the 200,000 shares of Series B Preferred Stock which
                  were
                  previously issued to Moshe and/or Maimon in connection with their
                  former
                  agreement to purchase the Aura Realty, Inc. property, would be
                  cancelled.
 
 ·
              We
                  agreed to dismiss our pending lawsuit against Maimon and Moshe
                  with
                  prejudice and all of the parties entered into mutual
                  releases.
 
 **Chapter
        11 Reorganization of Aura Realty, Inc.**
 
 On
        August
        8, 2005, Aura Realty, Inc., a 50.1% owned subsidiary of the Company, filed
        its
        own Chapter 11 bankruptcy proceeding in the United States Bankruptcy Court,
        Central District of California, (Case Number LA 05-27856-SB). Aura Realty
        is the
        owner of the company’s headquarters and manufacturing facility. The Company at
        the time of the filing was the lessee of the property. The filing was deemed
        necessary by the Company in order to protect the equity in the property in
        view
        of the inability of Aura Realty to cure outstanding arrearages to the senior
        lender, who had instituted foreclosure proceedings against the property.
        In
        October 2005 the Bankruptcy Court approved the sale of the real property
        to a
        third party for $8.75 million and the sale of the property was completed
        in
        December 2005. Subsequently Aura Realty obtained the dismissal of the bankruptcy
        proceeding.
  **Other
        Litigation**
 
 At
        the
        time of the filing by the Company of the Chapter 11 proceeding in June 2005
        it
        was engaged in numerous legal actions by creditors seeking payment of sums
        owed.
        The filing by the Company of the Chapter 11 bankruptcy proceeding acted as
        an
        automatic stay of all pending litigation as of the filing date without further
        approval of the Bankruptcy Court. Implementation of the Plan of Reorganization
        on January 31, 2006, resulted in the termination of these claims pursuant
        to the
        Plan of Reorganization.
  17
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  No
        matters were submitted to a vote of security holders in the fourth quarter
        of
        fiscal 2006.
  **PART
        II**
  **ITEM
        5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER
        PURCHASES OF EQUITY SECURITIES**
  From
        May
        21, 1991, to July 21, 1999, our common stock was listed on the NASDAQ National
        Stock Market. In July 1999 the shares were de-listed from the NASDAQ National
        Market as a result of our failure to meet the minimum $1.00 bid price and
        other
        requirements. On February 1, 2001, our shares were listed on the OTC Bulletin
        Board under the symbol "AURA". In July 2005, following the filing of our
        Chapter
        11 proceeding, our common stock ceased to be quoted on the OTC Bulletin Board.
        Since such time our common stock has been traded on the over-the-counter
        market
        under the symbol “AUSI”.
  Set
        forth
        below are high and low bid prices for our common stock for each quarterly
        period
        in the two most recent fiscal years. Such quotations reflect inter-dealer
        prices, without retail mark-up, markdown or commissions and may not necessarily
        represent actual transactions in the common stock. We had approximately 3,282
        stockholders of record as of May 31, 2006.
   Period
                  (a)
              
              High
              
              LowFiscal
                  2005First
                  Quarter ended May 31, 2004
              
              $
              22.65
              
              $
              8.79Second
                  Quarter ended August 31, 2004
              
              $
              18.59
              
              $
              10.14Third
                  Quarter ended November 30, 2004
              
              $
              23.66
              
              $
              11.83Fourth
                  Quarter ended February 28, 2005
              
              $
              13.86
              
              $
              9.13
  Period
              
              High
              
              LowFiscal
                  2006First
                  Quarter ended May 31, 2005
              
              $
              6.76
              
              $
              5.07Second
                  Quarter ended August 31, 2005
              
              $
              5.07
              
              $
              0.34Third
                  Quarter ended November 30, 2005
              
              $
              3.72
              
              $
              0.68Fourth
                  Quarter ended February 28, 2006
              
              $
              3.38
              
              $
              0.68
  On
        June
        30, 2006, the reported closing sales price for our common stock was
        $0.69.
  (a)
        Price
        adjusted for a 1 for 338 reverse split effective January 31, 2006.
  **Dividend
        Policy**
  We
        have
        not paid any dividends on our common stock and we do not anticipate paying
        any
        dividends on our common stock in the foreseeable future. During fiscal 2004
        we
        issued shares of Series A Convertible Redeemable Preferred Stock and in fiscal
        2005 we issued Series B Preferred Stock. Under the terms of the preferred
        shares
        we could not pay dividends on our common stock until dividends had been paid
        on
        the preferred shares. Effective with the implementation of our Chapter 11
        reorganization plan in January 2006 all of the outstanding shares of Series
        A
        Preferred Stock and Series B Preferred Stock were converted into common
        stock.
  **Repurchases
        of Equity Securities**
  We
        did
        not repurchase any shares of our common stock during the fourth quarter of
        fiscal 2006.
  18
  **Securities
        Authorized for Issuance Under Equity Compensation Plans** **as of February 28, 2006**
 
 **Equity
        Compensation Plan Information as of February 28, 2006**
 
 **Number
                  of Securities Remaining Available****Weighted-average**
              
              
              **for
                  Future Issuance****Number
                  of Securities to**
              
              
              **Exercise
                  Price of**
              
              
              **Under
                  Equity Compensation****be
                  Issued Upon Exercise**
              
              
              **Outstanding**
              
              
              **Plans
                  (Excluding Securities****of
                  Outstanding Options,**
              
              
              **Options,
                  Warrants and Rights**
              
              
              **Reflected
                  in Column (a))****Plan
                  Category**
              
              **Warrants
                  and Rights****(a)**
              
              
              **(b)**
              
              
              **(c)**Equity
                  compensation plans approved by security holders
              
              
              802,778
              
              
              $
              2.15
              
              
              
              197,222Equity
                  compensation plans not approved by security holders
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              802,778
              
              
              $
              2.15
              
              
              
              197,222
 
 We
        maintained two equity compensation plans as of February 28, 2006, both of
        which
        have been approved by our security holders under our Chapter 11 Bankruptcy
        Plan
        of Reorganization. Effective upon approval of the Plan in January 2006, a
        total
        of 500,000 warrants to purchase our common stock were reserved for issuance
        to
        management from time to time and 500,000 warrants were reserved for issuance
        to
        our directors from time to time.
  **ITEM
        6. SELECTED FINANCIAL DATA**
  The
        following Selected Financial Data has been taken or derived from our audited
        consolidated financial statements and should be read in conjunction with
        and is
        qualified in its entirety by the full-consolidated financial statements,
        related
        notes and other information included elsewhere herein.
  AURA
        SYSTEMS, INC. AND SUBSIDIARIES
  February
                  28,
                2006
              
              February
                  28,
                2005
              
              February
                  29,
                2004
              
              February
                  28,
                2003
              
              February
                  28,
                2002Net
                  revenues
              
              $
              1,756,105
              
              $
              2,525,431
              
              $
              1,864,325
              
              $
              1,103,770
              
              $
              3,116,295Cost
                  of goods sold
              
              $
              614,327
              
              $
              1,573,116
              
              $
              934,769
              
              $
              571,099
              
              $
              1,480,736Inventory
                write down
              
              $
              439,188
              
              $
              2,088,703
              
              $
              550,968
              
              $
              -
              
              $
              1,510,871Gross
                  profit (loss)
              
              $
              702,590
              
              $
              (1,136,388
              )
              $
              378,588
              
              $
              532,671
              
              $
              124,688Expenses:Engineering,
                  research & development
              
              $
              1,483,247
              
              $
              2,482,678
              
              $
              2,135,061
              
              $
              3,956,886
              
              $
              9,224,376Selling,
                  general and administrative
              
              $
              5,867,388
              
              $
              6,886,542
              
              $
              7,191,925
              
              $
              7,374,961
              
              $
              10,006,844Class
                  action litigation & other legal settlements
              
              $
              267,726
              
              $
              2,765,192
              
              $
              -
              
              $
              233,259
              
              $
              (2,750,000
              )Adjustment
                  to accounts payable
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (651,685
              )Impairment
                  losses on long-lived assets
              
              $
              -
              
              $
              544,510
              
              $
              2,000,398
              
              $
              2,300,000
              
              $
              7,661,559Severance
                  expense
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              241,243
              
              $
              1,080,525Total
                  expenses
              
              $
              7,618,361
              
              $
              12,678,912
              
              $
              11,327,384
              
              $
              14,106,349
              
              $
              24,571,619Loss
                  from operations
              
              $
              (6,915,771
              )
              $
              (13,815,300
              )
              $
              (10,948,796
              )
              $
              (13,573,678
              )
              $
              (24,446,931
              )Other
                  (income) and expense:Impairment
                  of investments
              
              $
              -
              
              $
              286,061
              
              $
              500,000
              
              $
              818,019
              
              $
              1,433,835Loss
                  on sale of minority interest in Aura Realty
              
              $
              -
              
              $
              -
              
              $
              231,000
              
              $
              626,676
              
              $
              -(Gain)
                  loss on sale of investments and assets
              
              $
              (2,446,798
              )
              $
              -
              
              $
              (201,061
              )
              $
              -
              
              $
              -Interest
                  expense
              
              $
              6,602,020
              
              $
              18,965,852
              
              $
              2,409,732
              
              $
              2,656,592
              
              $
              2,495,551Other
              
              $
              50,000
              
              $
              (166,345
              )
              $
              129,337
              
              $
              (362,096
              )
              $
              (535,179
              )Change
                  in derivative liability
              
              $
              (16,254,502
              )
              $
              (4,622,235
              )
              $
              -
              
              $
              -
              
              $
              -Provision
                  (benefit) for taxes
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (1,549,882
              )Minority
                  interest
              
              $
              -
              
              $
              (3,970
              )
              $
              (365,514
              )
              $
              14,018
              
              $
              -Gain
                  on extinguishment of debt obligations, net of income taxes
              
              $
              1,730,979
              
              $
              -
              
              $
              67,415
              
              $
              1,186,014
              
              $
              1,889,540Preferred
                  stock dividend
              
              $
              -
              
              $
              525,377
              
              $
              -
              
              $
              -
              
              $
              -Net
                  Income (Loss)
              
              $
              6,864,488
              
              $
              (28,800,040
              )
              $
              (13,584,875
              )
              $
              (16,140,873
              )
              $
              (24,936,895
              )
  Net
                  Income (Loss) per common share
              
              $
              2.24
              
              $
              (22.35
              )
              $
              (10.65
              )
              $
              (13.52
              )
              $
              (27.04
              )Weighted
                  average number of common shares
              
              
              3,063,216
              
              
              1,288,114
              
              
              1,276,056
              
              
              1,230,365
              
              
              969,194Cash/cash
                  equivalents
              
              $
              472,482
              
              $
              61,376
              
              $
              83,200
              
              $
              163,693
              
              $
              1,143,396Working
                  capital
              
              $
              2,567,684
              
              $
              (34,338,147
              )
              $
              (14,011,245
              )
              $
              (15,626,271
              )
              $
              (2,512,553
              )Total
                  assets
              
              $
              7,891,377
              
              $
              13,305,777
              
              $
              17,760,733
              
              $
              23,767,866
              
              $
              28,761,990Total
                  debt
              
              $
              5,140,554
              
              $
              36,535,119
              
              $
              15,545,829
              
              $
              13,345,378
              
              $
              10,895,466Net
                  stockholders' equity (deficit)
              
              $
              4,082,983
              
              $
              (23,883,233
              )
              $
              (3,614,425
              )
              $
              4,712,176
              
              $
              12,652,733
  **ITEM
        7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF
        OPERATIONS**
  **Forward
        Looking Statements.**
  *This
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations includes many forward-looking statements. For cautions about relying
        on such forward looking statements, please refer to the section entitled
        “Forward Looking Statements” at the beginning of this report immediately prior
        to “Item 1”.*
  19
  **Overview**
  We
        design, assemble and sell the AuraGen ® ,
        our
        patented mobile power generator that uses the engine of a vehicle to generate
        power. The AuraGen ® delivers
        on-location, plug-in electricity for any end use, including industrial,
        commercial, recreational and military applications. We began commercializing
        the
        AuraGen ® in late
        1999. To date, AuraGen ® units
        have been sold to numerous industries, including recreational, utilities,
        telecommunications, emergency/rescue, public works, catering, oil and gas,
        transportation, government and the military.
  We
        were
        founded in 1987 and, until 1992, primarily engaged in supplying defense
        technology to classified military programs. In 1992 we transitioned to being
        primarily a supplier of consumer and industrial products and services using
        our
        technology. In 1994, we founded NewCom, Inc., which sold and distributed
        computer communications and sound products such as CD-ROMs and sound cards.
        In
        1997, we acquired MYS Corporation of Japan (“MYS”), a manufacturer of speaker
        systems. NewCom ceased operations in 1999 and we experienced severe financial
        hardship from this and other causes. In fiscal 2000, we sold MYS, our business
        divisions providing sound products, and other assets, restructured substantial
        indebtedness and concentrated our focus on the AuraGen ® product.
        Since fiscal 2002 sales and support of the AuraGen ® have
        provided substantially all of our operating revenues.
  We
        have
        not yet achieved a level AuraGen ® sales
        sufficient to generate positive cash flow. Accordingly, we have depended
        on
        repeated infusions of cash in order to maintain liquidity as we have sought
        to
        develop sales. During fiscal 2002 through fiscal 2004, we substantially reduced
        our internal staffing due to the slower-than-anticipated level of
        AuraGen ® sales.
        We also suspended substantially all research and development activities.
        We
        continued to downscale our operations in fiscal 2005.
  In
        September 2004, we entered into agreements with a group of investors and
        holders
        of secured debt in order to recapitalize the company. These agreements are
        referred to as the "2004 Recapitalization Transactions" or “2004
        Recapitalization” and are described in more detail below under "Liquidity and
        Capital Resources - The 2004 Recapitalization Transactions". Completion of
        the
        2004 Recapitalization Transactions was intended to provide us with a more
        stable
        financial condition by infusing new capital of up to $15 million through
        the
        sale of units comprising Series B Preferred Stock and common stock warrants,
        conversion of $3.5 million of secured debt into Series B Preferred Stock
        and
        warrants and extension of the maturity of the remaining $2.1 million of secured
        debt to August 2005, and the settlement of legal claims with former management.
        However, we continued to require further financing to remain solvent.
        Accordingly, subsequent to the end of fiscal 2005, in June 2005 we filed
        for
        protection under Chapter 11 of the U.S. Bankruptcy Code, and emerged on January
        31, 2006 under a plan of reorganization.
  Our
        financial statements included in this report have been prepared on the
        assumption that we will continue as a going concern, which contemplates the
        realization of assets and satisfaction of liabilities in the normal course
        of
        business. However, as a result of our losses from operations there is
        substantial doubt about our ability to continue as a going concern. 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 our possible
        inability to continue as a going concern.
  Our
        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 obtain financing sources to meet our obligations. There
        is
        no assurance that such efforts will be successful.
  Our
        current level of sales reflects our efforts to introduce a new product into
        the
        marketplace. Many purchases of the product are being made for evaluation
        purposes. We seek to achieve profitable operations by obtaining market
        acceptance of the AuraGen ® as a
        competitive - superior - product providing mobile power, thereby causing
        sales
        to increase dramatically to levels which support a profitable operation.
        There
        can be no assurance that this success will be achieved.
  20
  **Critical
        Accounting Policies and Estimates**
  Our
        discussion and analysis of our financial conditions and results of operations
        are based upon our consolidated financial statements, which have been prepared
        in accordance with accounting principles generally accepted in the United
        States
        of America. The preparation of financial statements requires management to
        make
        estimates and disclosures on the date of the financial statements. On an
        on-going basis, we evaluate our estimates, including, but not limited to,
        those
        related to revenue recognition. We use authoritative pronouncements, historical
        experience and other assumptions as the basis for making judgments. Actual
        results could differ from those estimates. We believe that the following
        critical accounting policies affect our more significant judgments and estimates
        in the preparation of our consolidated financial statements.
  *Revenue
        Recognition*
  We
        are
        required to make judgments based on historical experience and future
        expectations, as to the reliability of shipments made to our customers. These
        judgments are required to assess the propriety of the recognition of revenue
        based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition,"
        and
        related guidance. Because sales are currently in limited volume and many
        sales
        are for evaluative purposes, we have not booked a general reserve for returns.
        We will consider an appropriate level of reserve for product returns when
        our
        sales increase to commercial levels.
  *Inventory
        Valuation and Classification*
  Inventories
        consist primarily of components and completed units for our AuraGen ® product.
        Inventories are valued at the lower of cost (first-in, first-out) or market.
        Provision is made for estimated amounts of current inventories that will
        ultimately become obsolete due to changes in the product itself or vehicle
        engine types that go out of production. Due to continuing lower than projected
        sales, we are holding inventories in excess of what it expects to sell in
        the
        next fiscal year. The net inventories which are not expected to be realized
        within a 12-month period based on current sales forecasts have been reclassified
        as long term. Management believes that existing inventories can, and will,
        be
        sold in the future without significant costs to upgrade it to current models
        and
        that the valuation of the inventories, classified both as current and long-term
        assets, accurately reflects the realizable values of these assets. The
        AuraGen ® product
        being sold currently is not technologically different from those in inventory.
        Existing finished goods inventories can be upgraded to the current model
        with
        only a small amount of materials and manpower. We make these assessments
        based
        on the following factors: i) existing orders, ii) age of the inventory, iii)
        historical experience and iv) our expectations as to future sales. If expected
        sales volumes do not materialize or if significant discounts from current
        pricing levels are granted to generate sales, there would be a material impact
        on our financial statements.
  *Valuation
        of Long-Lived Assets*
  Long-lived
        assets, consisting primarily of property and equipment, and patents and
        trademarks, comprise a significant portion of our total assets. Long-lived
        assets are reviewed for impairment whenever events or changes in circumstances
        indicate that their carrying values may not be recoverable. Recoverability
        of
        assets is measured by a comparison of the carrying value of an asset to the
        future net cash flows expected to be generated by those assets. Net cash
        flows
        are estimated based on expectations as to the realizeability of the asset.
        Factors that could trigger a review include significant changes in the manner
        of
        an asset's use or our overall strategy.
  Specific
        asset categories are treated as follows:
  Accounts
        Receivable: We record an allowance for doubtful accounts based on management's
        expectation of collectibility of current and past due accounts
        receivable.
  Property,
        Plant and Equipment: We depreciate our property and equipment over various
        useful lives ranging from five to ten years. Adjustments are made as warranted
        when market conditions and values indicate that the current value of an asset
        is
        less than its net book value.
  21
  When
        we
        determine that an asset is impaired, it measures any such impairment by
        discounting an asset's realizable value to the present using a discount rate
        appropriate to the perceived risk in realizing such value. When we determine
        that an impaired asset has no foreseeable realizable value, it writes such
        asset
        down to zero.
  **Results
        of Operations**
  In
        fiscal
        2006, we reported net income of $6.9 million. This was primarily as a result
        of
        the recording of income of $16.3 million from a change in derivative liability
        that essentially reversed a charge for this amount in fiscal 2005. Our fiscal
        2005 net loss was $28.8 million, with $17.8 million of that loss related
        to
        non-cash charges for depreciation, amortization, asset impairments and
        beneficial conversion of certain debt instruments. In fiscal 2004, the net
        loss
        was $13.6 million and the similar non-cash charges were $7.0 million. Net
        operating revenues and gross profit were $1.8 million and $.7 million,
        respectively, in fiscal 2006, $2.5 million and $(1.1) million, respectively,
        in
        fiscal 2005, and $1.9 million and $0.4 million, respectively, in fiscal
        2004.
  *Revenues*
  Net
        revenues in fiscal 2006 decreased $769,326 to $1,756,105 from $2,525,431
        in
        fiscal 2005, a decrease of 30%. This was due primarily to the lack of financial
        resources, the reduction in the workforce and the filing of
        bankruptcy.
 
 Net
        revenues in fiscal 2005 increased $661,106 to $2,525,431 from $1,864,325
        in
        fiscal 2004, an increase of 35% due primarily to a contract with a supplier
        of
        vehicles for the government.
  *Cost
        of Goods*
  Cost
        of
        Goods sold in fiscal 2006 decreased $958,789 to $614,327 from $1,573,116
        in
        fiscal 2005. As a percentage of net revenues, cost of goods sold was 35%
        in
        fiscal 2006 compared to 62.4% in fiscal 2005. On the low level of sales we
        have
        had, this percentage can vary substantially from year to year based on the
        mix
        of product sold.
  Cost
        of
        Cost of goods sold in fiscal 2005 increased $634,347 to $1,573,116 from $934,769
        in fiscal 2004. As a percentage of net revenues, cost of goods sold was 62.4%
        in
        fiscal 2005 compared to 50.1% in fiscal 2004. This was a result of the mix
        of
        products sold.
  *Engineering,
        Research and Development*
  Engineering,
        research and development decreased $999,421 to $1,483,247 in fiscal 2006
        from
        $2,482,668 in fiscal 2005. The decrease is largely attributable to the
        substantial reduction in workforce that was necessitated by our financial
        condition and the filing of bankruptcy.
  Engineering,
        research and development increased $347,607 to $2,482,668 in fiscal 2005
        from
        $2,135,061 in fiscal 2004. The increase is primarily attributable to a
        government contract. As a percentage of net revenues, engineering, research
        and
        development was 98.3% in fiscal 2005 compared to 114.5% in fiscal 2004. Research
        and development activities were negligible in fiscal 2005 and 2004 as we
        significantly reduced our research activities due to our financial condition.
        We
        expect research and development activities to continue at this reduced level
        until we have the financial resources available to fund such
        activities.
  *Selling,
        General and Administrative*
  Selling,
        general and administrative expenses in fiscal 2006 decreased $1,019,154 (15%)
        to
        $5,867,388 from $6,886,542 in fiscal 2005. The decrease is primarily
        attributable to the continued decrease in our workforce.
 
 Selling,
        general and administrative expenses ("SG&A") declined $305,383 (4%) to
        $6,886,542 in fiscal 2005 from $7,191,925 in fiscal 2004. As a percentage
        of net
        revenues, SG&A was 273% in fiscal 2005 compared to 386% in fiscal 2004. The
        decrease is primarily attributable to our ongoing cost cutting efforts and
        personnel reduction.
  22
  *Legal
        Settlements*
  Legal
        settlements of $2,765,192 were recorded in fiscal 2005 primarily as a result
        of
        the settlement of various litigation against us and certain of our officers
        by
        members of our former management and others as part of the 2004
        Recapitalization. Approximately $1.5 million of this expense arose from
        valuations of the warrants, options and Series B units issued as part of
        the
        settlement. There was no comparable expense in fiscal 2006. See “Liquidity and
        Capital Resources” below for further information regarding the terms of the
        settlement. **
  *Asset
        Impairment*
  During
        fiscal 2005 we recorded an asset impairment charge of $.5 million for the
        book
        value of our patents due to continued low sales.
  During
        fiscal 2004, we recorded an asset impairment charge of $2.0 million with
        regard
        to the book value of certain of our patents and trademarks related to products
        which were not related to our core business where we could not justify that
        value based on our projections of revenues or cash flows during their remaining
        lives.
  *Non-Operating
        Income and Expenses*
  We
        incurred $0.3 million and $0.5 million of investment impairment charges in
        fiscal 2005 and fiscal 2004, respectively, primarily due to a decline in
        the
        value of non-core long-term investments.
  Interest
        expense decreased $12.4 million in fiscal 2006 to $6.6 million from $19 million
        in fiscal 2005. The prior years expense was substantially increased due to
        the
        charges attributable to the beneficial conversion feature of convertible
        notes
        and warrants issued as part of a litigation settlement.
  Interest
        expense increased to $19 million in fiscal 2005 from $2.4 million in fiscal
        2004. Interest expense in 2005 consisted primarily of approximately $19.2
        million in charges attributable to a beneficial conversion feature of
        convertible notes, and warrants issued as part of the global settlement arising
        from the settlement of litigation.
  Other
        income/expense, net was an expense of $.05 million in fiscal 2006, $0.15
        million
        in fiscal 2005 and $0.1 million in fiscal 2004.
  We
        recognized income of $16.2 million for a change in derivative liability in
        fiscal 2006, compared to income of $4.6 million in fiscal 2005. This resulted
        from a reversal in the liability that was incurred for warrants that were
        exercisable, but for which there were not sufficient shares
        authorized.
  We
        realized gains of approximately $1.7 million in fiscal 2006 from bankruptcy
        settlements, and $0.1 million in fiscal 2004 from the forgiveness of
        debt by certain of our creditors.
  **Liquidity
        and Capital Resources**
  At
        February 28, 2006, we had cash of approximately $472,000 compared to
        approximately $61,000 at February 28, 2005. We had working capital of
        approximately $2.9 million at February 28, 2006, as compared to a deficit
        of
        approximately $34 million at the end of the prior fiscal year. The increase
        in
        working capital reflects an “other receivable” of $2,654,864 resulting from the
        sale of our buildings and monies held in escrow from the sale of stock, and
        the
        conversion of approximately $12.1 million of current liabilities into common
        stock and warrants under the Chapter 11 Plan of Reorganization effected on
        January 31, 2006 (the “Plan” or “Plan of Reorganization”).
  At
        February 28, 2006, we had accounts receivable, net of allowance for doubtful
        accounts, of approximately $88,000, and approximately $637,000 at February
        28,
        2005. Our collections tend to average 60 - 90 days from invoice due to the
        nature of our significant customers. There was no spending for property and
        equipment in either fiscal 2006 or fiscal 2005, and less than $0.1 million
        in
        fiscal 2004. As of February 28, 2006, we had no material capital project
        that
        would require funding. We made debt repayments of $4.7 million in fiscal
        2006 as
        a result of the payoff of the mortgage on the buildings that were sold in
        December 2005, $0.1million of debt repayments in fiscal 2005 and $0.5 million
        in
        fiscal 2004.
  23
  Our
        revenues from operations are derived solely from sales of the
        AuraGen ®. The
        cash
        flow generated from our operations has not been sufficient to fund our working
        capital needs. In the past, in order to maintain liquidity we have relied
        upon
        external sources of financing, principally equity financing and private
        indebtedness.
  As
        of May
        31, 2005, we had a working capital deficiency of $39.5 million, no cash or
        cash
        equivalents, negative cash flow from operations and no readily available
        sources
        of additional working capital. In order to allow sufficient time to raise
        additional capital and restructure outstanding indebtedness we filed for
        protection under Chapter 11 of the U.S. Bankruptcy Code in June 2005. The
        bankruptcy proceeding and the events leading up to the bankruptcy proceeding
        are
        discussed in more detail below. During the remainder of fiscal 2006, following
        commencement of our bankruptcy proceeding, we continued to rely on third
        party
        funding to cover our cash shortfalls, which included a series of secured
        debt
        financings aggregating more than $3.3 million during the pendency of our
        Chapter
        11 proceeding and $3 million raised in a private placement of common stock
        and
        warrants to a group of “new money” investors as part of the Plan of
        Reorganization.
  *Background
        of Chapter 11 Reorganization*
  In
        September 2004, we entered into agreements with a group of investors and
        holders
        of secured debt in order to recapitalize the Company (the "2004 Recapitalization
        Transactions"). Completion of the 2004 Recapitalization Transactions was
        intended to provide us with a more stable financial condition by infusing
        new
        capital of up to $15 million through the sale of units comprising Series
        B
        Preferred Stock and common stock warrants, conversion of $3.5 million of
        secured
        debt into Series B Preferred Stock and warrants and extension of the maturity
        of
        the remaining $2.1 million of secured debt to August 2005, and the settlement
        of
        legal claims with former management. Subsequent to February 28, 2005, some
        of
        the investors who agreed to purchase Series B units failed to pay the
        subscription price when due in fiscal 2006, leaving more than $3 million
        of
        subscriptions unpaid as of May 31, 2005, resulting in defaults in other
        financial obligations. Without sufficient funds to operate, the inability
        to
        collect funding from the Series B investors in a timely manner, creditors
        aggressively pursuing the Company, and the inability to mount an adequate
        funding effort, we determined that filing for protection under the U.S.
        bankruptcy laws was the only way to preserve the going concern value of the
        Company. Accordingly, in June 2005 we filed for protection under Chapter
        11 of
        the U.S. Bankruptcy Code and continued day-to-day operations as a debtor
        in
        possession, under the supervision of the Bankruptcy Court.
  At
        the
        time of our bankruptcy filing we were generating approximately $180,000 of
        monthly revenue and had approximately $500,000 of monthly operating expenses,
        with no cash reserves. Substantially all of our assets, including our operating
        revenues, were encumbered by liens in favor of a group of lenders holding
        secured notes (the “Secured Notes”) with an aggregate principal balance of
        approximately $6 million. Therefore, our ability to continue to operate during
        the Chapter 11 proceeding was dependent upon our ability to use our operating
        revenue to pay expenses and to obtain “debtor-in-possession” financing.
        Accordingly, through agreements reached by the Company with the lenders holding
        the Secured Notes, and the approval of the bankruptcy court, between July
        and
        December of 2005, we concluding a series of three new secured financings,
        totaling $3.36 million, with three new lenders (the “DIP Lenders”).
  In
        December 2005 the U.S. Bankruptcy Court ordered that a Plan of Reorganization
        proposed by us be circulated for approval by our creditors and shareholders,
        subject to the final confirmation of the Bankruptcy Court. The Plan of
        Reorganization was approved in January 2006 and became effective on January
        31,
        2006 (the “Effective Date”). Following is a summary of some of the principal
        elements of the Plan.
  *Principal
        Terms of the Chapter 11 Plan of Reorganization*
  The
        principal terms of the Plan, which became effective on January 31, 2006,
        are as
        follows:
  *Secured
        Note Holders* - The
        holders of the Secured Notes outstanding when the Chapter 11 proceeding was
        filed, with an approximate principal balance of $5.5 million immediately
        prior
        to the Effective Date, received 1,134,000 shares of Common Stock, warrants
        to
        purchase 259,900 shares of Common Stock, and restated Secured Notes with
        a
        reduced principal balance of $2,525,000 on the Effective Date, after giving
        effect to a $75,000 cash payment by the Company on the Effective Date. The
        Secured Notes, as restated, continued to be secured by a lien on substantially
        all of the property of the Company, with annual interest of 7%, and payable
        in
        48 equal monthly installments commencing 12 months after the Effective
        Date.
  24
  *DIP
        Lenders* - The
        DIP Lenders converted all of their approximately $4.06 million of loans
        immediately prior to the Effective Date into 6,065,699 shares of Common Stock
        and warrants to purchase 606,570 shares of Common Stock on the Effective
        Date.
 
 *Unsecured
        Claims* -
        Holders of approximately $8.3 million of unsecured claims against the Company
        immediately prior to the Effective Date received approximately 4.7 million
        shares of Common and warrants to purchase 945,900 shares of Common Stock
        on the
        Effective Date in exchange for their unsecured claims.
 
 *New
        Money Investors -* A
        group
        of new investors (“New Money Investors”) contributed a total of $3,045,000 of
        new money on the Effective Date in exchange for 3,349,500 shares of Common
        Stock
        and warrants to purchase 669,000 shares of Common Stock, of which approximately
        $1.1 million was used to pay administrative expenses of the bankruptcy
        proceeding outstanding on the Effective Date. An additional 837,375 shares
        of
        Common Stock were issued under the Plan following the Effective Date as the
        Company did not timely file a registration statement.
 
 *Series
        A Preferred Stockholders* - The
        holders of the Series A Preferred Stock, of which 591,110 shares were
        outstanding immediately prior to the Effective Date, received a total of
        357,818
        shares of Common Stock and warrants to purchase 89,455 shares of Common Stock
        in
        exchange for their Series A Preferred Stock.
 
 *Series
        B Preferred Stockholders* - The
        holders of $9,979,838 of Series B Preferred Stock which was fully paid for
        immediately prior to the Effective Date, received a total of 3,215,712 shares
        of
        Common Stock and warrants to purchase 987,195 shares of Common Stock in exchange
        for their Series B Preferred Stock. The remaining, unpaid shares of Series
        B
        Preferred Stock were cancelled on the Effective Date.
 
 *Common
        Stockholders* - The
        holders of the 439,458,082 shares of Common Stock outstanding immediately
        prior
        to the Effective Date (“Old Common Stock”) received approximately 1.3 million
        shares of new Common Stock in the reorganized Company on the Effective Date
        in
        exchange for the Old Common Stock (i.e. one share of new Common Stock in
        exchange for each 338 shares of Old Common Stock).
 
 *Aries
        Group Reorganization Fee* - For
        major contributions to the Plan, Disclosure Statement which describes the
        Plan,
        business analysis and modeling, feasibility study, assistance in settlement
        disputes between the Company and certain creditors, and providing valuation
        analysis for pricing of the investment by the New Money Investors as well
        as the
        conversion rates for the DIP Lenders, the Aries Group received 2,541,500
        shares
        of the Company’s Common Stock and warrants to purchase 508,300 shares of Common
        Stock. The Plan provided that of these 2,541,500 shares of Common Stock and
        508,300 warrants received by the Aries Group, 900,000 shares of Common Stock
        and
        179,800 Warrants were to be delivered to Harry Kurtzman.
 
 *New
        Warrants -* The
        warrants to purchase a total of approximately 3,807,319 shares of Common
        Stock
        issued under the Plan to the New Money Investors, the DIP Lenders, holders
        of
        unsecured claims, holders of Series A and Series B Preferred Stock and the
        Aries
        Group entitled the warrant holder to purchase Common Stock at a price of
        $3.00
        per share during the first 12 months following the Effective Date, $3.50
        per
        share during the second 12 months following the Effective Date, and $4.00
        per
        share thereafter. The warrants to purchase a total of 259,900 shares of Common
        Stock issued under the Plan to the holders of the Secured Notes entitled
        the
        warrant holder to purchase Common Stock at a price of $2.00 per share during
        the
        first 12 months following the Effective Date, $2.50 per share during the
        second
        12 months following the Effective Date, and $3.00 per share thereafter. The
        Plan
        also provided for the reservation by the Company of warrants for 500,000
        shares
        for the Company’s management and 500,000 shares for members of the Board of
        Directors, to be issued by the Company from time to time.
 
 **Contractual
        Obligations** **
  The
        table
        below describes the Company’s future contractual obligations, including items
        not included in the consolidated balance sheet, as of February 28, 2006:
 
 At
        February 28, 2006, we had the following contractual obligations and commercial
        commitments:
  25
  **Payments
                  Due by Period****Contractual
                  Obligations**
              
              
              
              **Total**
              
              **Less
                  Than 1 Year**
              
              **1-3 Years**
              
              **3-5 Years**
              
              **More
                  Than 5 Years**Long
                  term debt
              
              
              a.
              )
              $
              2,525,000
              
              $
              48,766
              
              $
              1,942,986
              
              $
              533,248
              
              $
              0Capital
                  lease obligations
              
              
              
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0Operating
                  leases
              
              
              b.
              )
              $
              386,100
              
              $
              210,600
              
              $
              175,500
              
              $
              0
              
              $
              0Minimum
                  license commitment
              
              
              
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0Fixed
                  asset and inventory purchase commitments
              
              
              
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0Total
                  contractual cash obligations
              
              
              
              
              $
              2,911,100
              
              $
              259,366
              
              $
              2,118,486
              
              $
              533,248
              
              $
              0
 a.)
              Represents
                  notes payable dated January 31, 2006, bearing interest at a rate
                  of 7% per
                  annum and secured by our intellectual property. The notes carry
                  a term of
                  five years with interest accruing the first 12 months, principal
                  and
                  interest payments beginning the 13th month, and continuing through
                  month
                  60. During the year ended February 28, 2007, $167,346 in accrued
                  and
                  unpaid interest was added to the principal balance of the
                  notes.
 
 b.)
              Represents
                  obligations for the lease of our
                  facilities.
  **ITEM
        7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
  We
        are
        exposed to various market risks, including changes in interest rates. Market
        risk is the potential loss arising from adverse changes in market rates and
        prices. We consider our exposure to market risks to be immaterial. Historically,
        we have not entered into derivative financial instrument transactions to
        manage
        or reduce market risk or for speculative purposes. Our long term debt
        obligations all bear interest at fixed rates and, therefore, have no exposure
        to
        interest rate fluctuations. Our risk related to foreign currency fluctuations
        is
        not material at this time, as any accounts we have in foreign denominations
        are
        not in themselves material.
 
 As
        we
        anticipate needing to use the cash we held at year end within a short period,
        we
        have invested it in money market accounts, and we do not expect that the
        amount
        of fluctuation in interest rates will expose us to any significant risk due
        to
        market fluctuation.
  **ITEM
        8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
  See
        Index
        to Consolidated Financial Statements at page F-1.
  **ITEM
        9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  Not
        applicable.
  **ITEM
        9A. CONTROLS AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 Disclosure
        controls and procedures are designed to provide reasonable assurance that
        information required to be disclosed by us in the reports that we file or
        submit, is recorded, processed, summarized and reported, within the time
        periods
        specified in the U.S. Securities and Exchange Commission’s rules and forms,
        and such information is accumulated and communicated to management as
        appropriate to allow timely decisions regarding required disclosures. Our
        Chief
        Executive Officer and Chief Financial Officer have evaluated our disclosure
        controls and procedures and have concluded, as of February 28, 2006, that
        they
        were not effective in view of our delinquent filings.
  26
 
 As
        of
        February 28, 2006, we were delinquent in filing all quarterly and annual
        SEC
        reports due since November 30, 2004. We did not have adequate financial
        resources to engage our outside auditors and ensure the timely filing of
        Form
        10-K for the fiscal year ended February 28, 2005, as disclosed in Form 12b-25
        filed with the SEC on May 26, 2005. In June 2005 our financial condition
        required us to seek protection from creditors under Chapter 11 of the U.S.
        Bankruptcy Code. The commencement of the bankruptcy proceeding placed additional
        demands on our then existing accounting personnel, including the filing of
        monthly financial reports with the bankruptcy court and the SEC. Our limited
        financial and personnel resources did not allow us to fully address our
        reporting obligations under the Securities Exchange Act of 1934 until we
        emerged
        from bankruptcy on January 31, 2006. As of February 28, 2006, we experienced
        additional events which further delayed the filing of our delinquent SEC
        reports. Specifically, the integrity of our financial records was severely
        disrupted as a result of errors made by temporary file personnel in December
        2005 in the course of moving our principal office from 2335 Alaska Avenue
        to our
        Utah Avenue location. In addition, we experienced a change in our Chief
        Financial Officer and other accounting personnel towards the end of the February
        2006 quarter, further compounding delays during this period.
 
 **Changes
        in Internal Control over Financial Reporting**
  There
        have been no changes in our internal control over financial reporting during
        our
        fiscal quarter ended February 28, 2006, that have materially affected or
        are
        reasonably likely to materially affect our internal control over financial
        reporting.
  27
  **PART
        III**
  **ITEM
        10. DIRECTORS AND EXECUTIVE OFFICERS**
  *Directors*
  The
        following table sets forth as of March 1, 2008, our directors, their age,
        and
        the office they hold.
  Name
              
              Age
              
              Title**Directors**Melvin
                  Gagerman
              
              64
              
              Chairman,
                  Director, Chief Executive Officer, Chief Financial Officer and
                  PresidentArthur
                  J. Schwartz, PhD
              
              59
              
              Director,
                  Chief Technical OfficerDr.
                  Maurice Zeitlin
              
              65
              
              Director,
                  Chairman - Nominating Committee; member, Compensation Committee
                  and Audit
                  CommitteeWarren
                  Breslow
              
              64
              
              Director,
                  Chairman - Audit Committee; member, Nominating Committee and Compensation
                  CommitteeSalvador
                  Diaz-Verson, Jr.
              
              52
              
              Director,
                  Chairman, Compensation Committee; member, Audit Committee and Nominating
                  Committee**Other
                  Executive Officers**Yedidia
                  Cohen
              
              51
              
              Vice
                  President of Engineering
  The
        following sets forth as of March 1, 2008, certain information with respect
        to
        our directors and executive officers as of the date of this report **.**
  **Melvin
        Gagerman -** Mr.
        Gagerman has been the CEO and CFO of the Company since we emerged from Chapter
        11 proceedings on January 31, 2006. He has many years of experience in all
        aspects of managing companies and a very strong background in accounting
        and
        finance. Mr. Gagerman was the President of Hollywood Trading Co., a distributor
        of novelty items, from 2000 until February 2006, when he became CEO of the
        Company. Prior to that Mr. Gagerman was the CEO of Surface Protection Industries
        from 1976 to 1977, where he successfully reorganized key management positions;
        established relationships with new distributors and upgraded manufacturing
        abilities, developed aggressive marketing programs to revitalize mature product
        lines and identified new market opportunities to increase sales and profits.
        From 1973 to 1975 Mr. Gagerman was the Chairman and CEO of Applause, where
        he
        successfully reorganized a world famous designer, manufacturer and distributor
        of licensed and generic stuffed toys which had sales of $137 million per
        year,
        700 employees and losses of 12 million dollars a year. By aggressively altering
        product lines, adding new lines, cutting overhead, restructuring several
        key
        management positions, the company produced a $4.5 million profit within one
        year. Mr. Gagerman has also served as Managing Partner of Good, Gagerman
&
Berns, an accounting firm, National Audit Partner for Laventhol and Horwath
        and
        Audit Supervisor at Coopers and Lybrand.
  **Arthur
        J. Schwartz, PhD** - Dr.
        Schwartz has been CTO and a director of the Company since it emerged from
        Chapter 11 proceedings on January 31, 2006. From 2002 to 2006 Dr. Schwartz
        was a
        principal in the business consulting firm Aries Group Ltd. Dr. Schwartz is
        one
        of the founders of the Company and was a member of Aura’s management from1987
        until 2002 as Executive Vice President, CTO and director. Dr. Schwartz has
        been
        has been involved in all technical aspects of the Company and has been
        instrumental in many of our government programs. Prior to founding Aura,
        Dr.
        Schwartz worked at Hughes Aircraft Company as a senior scientist on classified
        programs. Dr. Schwartz has a Ph.D in Physics.
  **Dr.
        Maurice Zeitlin** - Dr.
        Maurice Zeitlin has been a director of the Company since it emerged from
        Chapter
        11 proceedings on January 31, 2006. Since 1985, Dr Zeitlin has been the
        President and owner of Maurice A. Zeitlin M.D., a Medical Corporation. He
        currently practices administrative medicine and is the medical director for
        several Los Angeles area hospitals. Dr. Zeitlin was a Major in the USAF from
        1972 until 1974 He attended the University of Chicago and received his M.D
        in
        1967.
  28
  **Warren
        Breslow** - Mr.
        Breslow has been a director and Chairman of the Audit Committee since it
        emerged
        from Chapter 11 bankruptcy proceedings on January 31, 2006. Mr. Breslow is
        the
        General Partner and Chief Financial Officer of Goldrich & Kest Industries
        (“G & K Industries”), a property management firm. He joined G & K
        Industries in 1972 as controller and assumed his current position as General
        Partner and Chief Financial Officer in 1974. As General Partner and Chief
        Financial Officer of G & K, Mr. Breslow oversees the financial aspects of G
& K’s construction activity, as well as their management operations and
        information systems center. He is also past president and lifetime member
        of the
        board of directors of the Stephen S. Wise Temple, and supports numerous
        charitable and civic organizations. Prior to his association with Goldrich
&
Kest Industries, Mr. Breslow was a manager with the International Accounting
        firm of Laventhol & Horwath. He is a CPA and graduated from the Bernard
        Baruch School of Business Administration.
  **Salvador
        Diaz-Verson, Jr.** is a
        director of the Company and has served in this capacity since June, 2007.
        He
        previously served as a director of the Company from 1997 to 2005. Mr.
        Diaz-Verson is the founder, Chairman and President of Diaz-Verson Capital
        Investments, Inc., an Investment Adviser registered with the SEC, where he
        has
        served since 1991. 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 AFLAC Inc., from 1976 through 1991. He is
        currently a Director of the board of Miramar Securities, Clemente Capital
        Inc.,
        Regions Bank of Georgia and The Philippine Strategic Investment Holding Limited.
        Since 1992, Mr. Diaz-Verson has also been a member of the Board of Trustees
        of
        the Christopher Columbus Fellowship Foundation, appointed by President George
        H.W. Bush in 1992, and re-appointed by President Clinton in early 2000. Mr.
        Diaz-Verson is a graduate of Florida State University.
 
 **Yedidia
        Cohen** - Mr.
        Cohen has been employed by us since July, 2001, developing numerous magnetic
        applications, and has been our VP of Engineering since May, 2006. Prior to
        being
        appointed VP of Engineering he was the lead engineer on the AuraGen mechanical
        tasks. Mr. Cohen has extensive experience in designing and building highly
        reliable and durable weapon systems. He spent much of his professional carrier
        at Raphael (Weapon development and testing facility for the Israeli Army).
        In
        addition to his vast experience in weapon systems, Mr. Cohen worked for
        Electric **** Power
        Corporation in Haifa, Israel, where he specialized in conceptual design of
        power
        generation plane, thermodynamic calculations, design of boilers, pressure
        vessels and heat exchangers. In addition to his engineering skills Mr. Cohen
        has
        experience in building and managing teams of engineers working on complex
        tasks.
        Mr. Cohen has a M.S.E.E degree in Mechanical Engineering from the Technion
        in
        Haifa, Israel
  *Section
        16(a) Beneficial Ownership Reporting Compliance*
  Section
        16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
        requires our officers and Directors, and beneficial owners of more than ten
        percent of the common stock, to file with the Securities and Exchange Commission
        and the National Association of Securities Dealers, Inc. reports of ownership
        and changes in ownership of the common stock. Copies of such reports, or
        written
        representations that no reports were required, are required to be furnished
        us.
        Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
        to
        us during our fiscal year ended February 28, 2006, and Form 5 and amendments
        thereto furnished to us covering the 2005 fiscal year filed under Section
        16(a)
        of the Securities Exchange Act of 1934, no person who was an officer or director
        or beneficial owner of more than 10% of our common stock failed to file on
        a
        timely basis, as disclosed in such Forms, the reports required by Section
        16(a)
        of the Exchange Act during such fiscal year or prior fiscal years.
  *Code
        of Ethics*
 
 We
        have a
        Code of Ethics for all of our employees, including our Chief Executive Officer,
        Chief Financial Officer and Principal Accounting Officer. The purpose of
        the
        Code is to ensure that our business is conducted in a consistently legal
        and
        ethical matter. A copy of our Code of Ethics is included as an exhibit to
        this
        Annual Report on Form 10-K.
  *Audit
        Committee*
 
 The
        Audit
        Committee of our Board of Directors recommends selection of independent public
        accountants to our Board, reviews the scope and results of the year-end audit
        with management and the independent auditors, reviews our accounting principles
        and our system of internal accounting controls and reviews our annual and
        quarterly reports before filing with the SEC. As of March, 2008, the members
        of
        our Audit Committee were Mr. Warren Breslow, (Chairman), Maurice Zeitlin
        and
        Salvador Diaz-Verson. Our Board has determined that all members of the Audit
        Committee were independent directors under the rules of the SEC and the listing
        standards of NASDAQ. Our Board also determined that Mr. Breslow is an “audit
        committee financial expert” in accordance with applicable SEC
        regulations.
  29
  **ITEM
        11. EXECUTIVE COMPENSATION**
  *Executive
        Compensation*
  The
        following table summarizes all compensation paid during the three fiscal
        years
        ended February 28, 2006, to the individual who served as our chief executive
        officer during fiscal 2006, and the one other most highly compensated executive
        officer who was serving in such capacity as of February 28, 2006 (together,
        the
        "Named Executive Officers"). Information is presented only for years in which
        an
        individual served as an officer of the Company.
 Name and
                
                Fiscal Year ended
                
                Annual
                    Compensation
                
                Long
                    Term
                  Compensation
                
                OtherPrincipal
                    Position
                
                February
                    28/29
                
                Salary
                
                Other
                
                Options/SARs
                    (2)
                
                CompensationRaymond
                    Yu (1)
                
                
                2006
                
                $
                215,385
                
                
                -
                
                
                -
                
                $
                25,990
                    (3
                )Chairman,
                      Chief Executive Officer and President
                
                
                2005
                
                $
                88,462
                
                
                -
                
                
                -
                
                
                -2004
                
                
                -Sandra
                    Ferro (4),
                
                
                2006
                
                
                145,094
                
                
                -
                
                
                -
                
                
                -Chief
                  Financial Officer
                
                
                2005
                
                
                46,154
                
                
                -
                
                
                -
                
                
                -2004
                
                
                -
  
 (1)
              Mr.
                  Yu was elected CEO, President and a director effective September
                  20, 2004,
                  and resigned in January2006.
                  The position of CEO then remained vacant until after the end of
                  the 2006
                  fiscal year.
 (2)
              No
                  long-term incentive payments or restricted stock awards were granted
                  to
                  the above individual during thethree
                  fiscal years ended February 28, 2006.
 (3)
              Represents
                  travel and living expenses away from
                  home.
 (4)
              Ms.
                  Ferro became the Chief Financial Officer on October 21, 2004, and
                  was
                  terminated in February 2006.
  No
        options were granted or exercised by the Named Executive Officers during
        the
        fiscal year ended February 28, 2006, and none of these individuals had any
        stock
        options outstanding as of February 28,  2006. *Employment
        Contracts and Change in Control Agreements as of February 28,
        2006*
  **Melvin
        Gagerman**
  Melvin
        Gagerman was appointed acting Chief Financial Officer in February
        2006. ** Under
        the original terms of his engagement Mr. Gagerman was to receive a starting
        salary, retroactive to January 1, 2006, of $300,000 per year, along with
        an
        automobile allowance of $1,000 per month. If the Company reported two
        consecutive profitable quarters, Mr. Gagerman’s salary was to be increased to
        $360,000 per year. In May 2006 Mr. Gagerman assumed the position of President
        and CEO.
  Effective
        January 31, 2006, Mr. Gagerman was awarded 250,000 Management Warrants by
        our
        Board of Directors as authorized under our Chapter 11 Plan of Reorganization.
        The terms of the Management Warrants provide for an exercise price of $2.00
        per
        share during the first 12 months from the effective date of issuance (January
        31, 2006) ,
        $2.50
        per share from the 13 th to the
        24 th months
        from the effective date of issuance; and $3.00 per share from the 25 th to the
        36 th month
        from the effective date of issuance. However, under the terms of Mr. Gagerman’s
        employment agreement, which are subject to shareholder approval under our
        Bylaws, the exercise price will be $2.00 per share. The Management Warrants
        vest
        over a 36 month period: 1/36 th of the
        shares of common stock underlying the warrant vest each month after the date
        of
        issuance, subject to his continuing to serve as an employee. However, under
        the
        terms of Mr. Gagerman’s employment agreement, which are subject to shareholder
        approval under our Bylaws, the warrants were fully vested as of May 1, 2006.
  30
 
 Effective
        January 31, 2006, Mr. Gagerman was awarded 350,000 Director Warrants by our
        Board of Directors as authorized under our Chapter 11 Plan of Reorganization.
        The terms of the Director Warrants provide for an exercise price of $2.50
        per
        share. However, under the terms of Mr. Gagerman’s employment agreement, which
        are subject to shareholder approval under our Bylaws, the exercise price
        will be
        $2.00 per share. The
        Director Warrants vest over a two year period: 25% of the shares of common
        stock
        underlying the warrant vest each six months after the effective date of issuance
        (January 31, 2006). However ,
        under
        the terms of Mr. Gagerman’s employment agreement, which are subject to
        shareholder approval under our Bylaws, the warrants were fully vested as
        of May
        1, 2006.
 
 **Sandra
        Ferro**
 
 On
        September 28, 2004, the Company entered into an Employment Agreement with
        Sandra
        Ferro (the “Ferro Agreement”), pursuant to which, effective October 21, 2004,
        Ms. Ferro became Chief Financial Officer of the Company. The Ferro Agreement
        provided (i) for Ms. Ferro’s starting annual salary of $120,000; and (ii) that
        if she were terminated by the Company without cause during the first two
        years
        of her employment, she would be entitled to receive a severance payment equal
        to
        30 days’ salary. In addition, the Ferro Agreement provided that she would be
        granted options to purchase 2,958 shares of the Company’s Common Stock at an
        exercise price of 19.27 per share. Such options were to vest 50% on the first
        anniversary of her employment and 50% on the second anniversary. As a result
        of
        the implementation of the Plan of Reorganization, the Ferro Agreement was
        cancelled on January 31, 2006, the Effective Date of the Plan.
  *Compensation
        of Directors*
  Directors
        are reimbursed for travel expenses incident to their service as a director
        but
        do not receive cash compensation. Directors are eligible to receive stock
        options and stock purchase warrants from time to time. All grants are at
        or
        above the fair market value of the common stock on the date of grant. In
        February 2006, following the effectiveness of the Plan of Reorganization,
        Arthur
        Schwartz, Sheldon Appel and Richard Armbrust were each awarded Director Warrants
        authorized under the Plan, entitling each of them to purchase 50,000 shares
        of
        common stock at an exercise price of $2.50 per share, vesting at the rate
        of 25%
        every six months and expiring three years from the date of grant. All grants
        are
        at or above the fair market value of the common stock on the date of grant.
        Warrants were also issued to Mr. Gagerman as Chairman of the Board and acting
        Chief Financial Officer. For information regarding warrants awarded to Melvin
        Gagerman, see “Employment Contracts and Termination of Employment and Change in
        Control Agreements” above.
  *Compensation
        Committee Interlocks and Insider Participation*
  During
        the fiscal year ended February 28, 2006, decisions regarding compensation
        of
        executive officers were made by the outside, disinterested Directors of the
        Board of Directors, after discussing the matter with the executive officer.
  **ITEM
        12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT** ** **AND
        RELATED STOCKHOLDER MATTERS**
  *Common
        Stock*
  The
        following table sets forth, to the extent of our knowledge, certain information
        regarding our Common Stock owned as of December 31, 2007 (i) by each person
        who
        is the beneficial owner of more than five percent (5%) of our outstanding
        Common
        Stock, (ii) by each of our Directors and the Named Executive Officers, and
        (iii)
        by all Directors and executive officers as a group:
  31
  **Beneficial
                  Owner**
              
              **Number
                  of Shares of****Common
                  Stock**
              
              **Percent
                  of**
                **Common
                  Stock (1))**ICM
                  Asset Management, Inc. (2)(3)
              
              
              1,492,388
              
              
              4.1
              %James
                  M. Simmons (2)(4)
              
              
              1,612,012
              
              
              4.4
              %Koyah
                  Ventures, LLC (2)(5)
              
              
              1,541,238
              
              
              4.2
              %Koyah
                  Leverage Partners, L.P. (2)(6)
              
              
              1,260,978
              
              
              3.4
              %Raymond
                  Yu
              
              
              -
              
              
              -Sandra
                  Ferro
              
              
              -
              
              
              -Melvin
                  Gagerman (7)
              
              
              611,501
              
              
              1.7
              %Arthur
                  Schwartz (8)
              
              
              728,659
              
              
              2.0
              %Maurice
                  Zeitlin (9)
              
              
              1,116,260
              
              
              3.0
              %Warren
                  Breslow (10)
              
              
              1,488,378
              
              
              4.1
              %Salvador
                  Diaz-Verson, Jr. (11)
              
              
              115,934
              
              
              *All
                  current executive officers and Directors as a group (eight)
              
              
              4,060,732
              
              
              11.1
              %
  *
        Less
        than 1% of outstanding shares.
  (1)
              Beneficial
                  ownership is determined in accordance with rules of the U.S. Securities
                  and Exchange Commission. The calculation of the percentage of beneficial
                  ownership is based upon 36,670,820 shares of common stock outstanding
                  on
                  December 31, 2007. In computing the number of shares beneficially
                  owned by
                  any shareholder and the percentage ownership of such shareholder,
                  shares
                  of common stock which may be acquired by a such shareholder upon
                  exercise
                  or conversion of warrants or options which are currently exercisable
                  or
                  exercisable within 60 days of December 31, 2007, are deemed to
                  be
                  exercised and outstanding. Such shares, however, are not deemed
                  outstanding for purposes of computing the beneficial ownership
                  percentage
                  of any other person. Shares issuable upon exercise of warrants
                  and options
                  which are subject to shareholder approval are not deemed outstanding
                  for
                  purposes of determining beneficial ownership. Except as indicated
                  by
                  footnote, to our knowledge, the persons named in the table above
                  have the
                  sole voting and investment power with respect to all shares of
                  common
                  stock shown as beneficially owned by them.
 
 (2)
              Based
                  upon information contained in Schedule 13G jointly filed with the
                  SEC on
                  February 13, 2008, by ICM Asset Management, Inc., Koyah Ventures,
                  LLC,
                  Koyah Leverage Partners, L.P. and James M. Simmons. The business
                  address
                  of these filers is601
                  W. Main Avenue, Suite 600, Spokane, Washington 99201.ICM
                  Asset Management, Inc., James M. Simmons and Koyah Ventures, LLC
                  constitute a group sharing beneficial ownership within the meaning
                  of Rule
                  13d-5(b)(1), but are not part of a group with any other person.
                  Koyah
                  Leverage Partners, L.P. expressly disclaims membership in a group
                  and
                  disclaims beneficial ownership of the common stock covered by the
                  Schedule
                  13G. ICM Asset Management, Inc. is a registered investment adviser
                  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 common stock.
                  James
                  M. Simmons is the Chief Executive Officer and controlling shareholder
                  of
                  ICM Asset Management, Inc. and the manager and controlling owner
                  of Koyah
                  Ventures, LLC. Koyah Ventures, LLC is the general partner of Koyah
                  Leverage Partners, L.P. and other investment limited partnerships
                  of which
                  ICM Asset Management, Inc. is the investment adviser. No individual
                  client
                  of ICM, other than Koyah Leverage Partners, L.P., holds more than
                  five
                  percent of the outstanding common stock.
 
 (3)
              Includes
                  sole dispositive and voting power of 862 shares and shared voting
                  and
                  dispositive power of 1,491,526
                  shares.
 
 (4)
              Includes
                  sole dispositive and voting power of 7,771 shares and shared voting
                  and
                  dispositive power of 1,612,012
                  shares.
 
 (5)
              Includes
                  sole dispositive and voting power of 119,503 shares and shared
                  voting and
                  dispositive power of 1,421,735
                  shares.
 
 (6)
              Includes
                  shared dispositive and voting power of 1,260,678
                  shares.
 
 (7)
              Includes
                  446,639 warrants and options exercisable within 60 days of December
                  31,
                  2007.
 
 (8)
              Includes
                  157,433 warrants and options exercisable within 60 days of December
                  31,
                  2007.
 
 (9)
              Includes
                  157,757 warrants and options exercisable within 60 days of December
                  31,
                  2007.
 
 (10)
              Includes
                  60,989 warrants and options exercisable within 60 days of December
                  31,
                  2007.
 
 (11)
              Includes
                  51,327 warrants and options exercisable within 60 days of December
                  31,
                  2007.
 
 32
  The
        mailing address for the officers and directors is c/o Aura Systems, Inc.,
        2330
        Utah Avenue, El Segundo, CA 90245.
  **ITEM
        13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
  During
        fiscal 2006 we entered into a number of agreements with persons who were
        directors or officers. For information regarding these agreements, see “ITEM 11.
        Executive Compensation.” In addition we entered into agreements with holders of
        our Secured Notes who beneficially own more than 5% of our common stock,
        Koyah
        Ventures, LLC and Koyah Leverage Partners, LP. For information regarding
        the
        transactions with the holders of the Secured Notes, see “Item 7 - Liquidity and
        Capital Resources.”
  **ITEM
        14. PRINCIPAL ACCOUNTING FEES AND DISCLOSURES**
  The
        Audit
        Committee regularly reviews and determines whether specific non-audit projects
        or expenditures with our independent auditors potentially affect their
        independence. The Audit Committee’s policy is to pre-approve all audit and
        permissible non-audit services provided by our independent auditors.
        Pre-approval is generally provided by the Audit Committee for up to one year,
        as
        detailed as to the particular service or category of services to be rendered,
        as
        is generally subject to a specific budget. The Audit Committee may also
        pre-approve additional services of specific engagements on a case-by-case
        basis.
  The
        following table sets forth the aggregate fees billed to us by Kabani & Co.
        for the years ended February 28, 2006 and 2005:
  **Year
                  Ended February 28,****2006**
              
              
              **2005**Audit
                  Fees(1)
              
              $
              82,500
              
              $
              82,500Audit-related
                  fees(2)
              
              
              -
              
              
              -Tax
                  fees
              
              
              -
              
              
              -All
                  other fees
              
              
              -
              
              
              -Total
              
              $
              82,500
              
              $
              82,500
  (1)
              
              Included
                  fees for professional services rendered for the audit of our annual
                  financial statements and review of our annual report on Form 10-K
                  and for
                  reviews of the financial statements included in our quarterly reports
                  on
                  Form 10-Q for the first three quarters of the years ended February
                  28,
                  2006 and 2005.(2)
              
              Includes
                  fees for professional services rendered in connection with our
                  evaluation
                  of internal controls.
  **PART
        IV**
  **ITEM
        15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**
  33
  A.    
        Documents filed as part of this Form 10-K:
  ***1.     
        Financial Statements***
  See
        Index
        to Consolidated Financial Statements at page F-1
  ***2.     
        Financial Statement Schedules***
  See
        Index
        to Consolidated Financial Statements at page F-1
  ***3.     
        Exhibits***
  See
        Exhibit Index
  *B.    
        Reports on Form 8-K*
  None
  34
  **INDEX
        TO EXHIBITS**
  **Description
        of Documents**
  2.1
              
              First
                  Amended Plan of Reorganization of Aura Systems, Inc.(2)3.1
              
              Amended
                  and Restated Certificate of Incorporation of Aura Systems, Inc..
                  (1)3.2
              
              Amended
                  and Restated Bylaws of Aura Systems, Inc. as amended to date.
                  (1)10.1
              
              Form
                  of Unsecured Creditor Warrants issued under First Amended Plan
                  of
                  Reorganization of the Company. (3)10.2
              
              Form
                  of Management Warrants issued under First Amended Plan of Reorganization
                  of Aura Systems, Inc.(3)10.3
              
              Form
                  of Director Warrants issued under First Amended Plan of Reorganization
                  of
                  t Aura Systems, Inc. (3)10.4
              
              Aura
                  Systems, Inc. 2006 Stock Option Plan. (3)10.5
              
              Form
                  of Aura Systems, Inc. Non-Statutory Stock Option Agreement.
                  (3)10.6
              
              Employment
                  Agreement dated January 4, 2007, by and between the Company and
                  Melvin
                  Gagerman. (3)10.7
              
              Full
                  Release dated as of January 31, 2006, by Aura Systems, Inc. for
                  the
                  benefit of Koyah Leverage Partners, L.P., Koyah Partners, L.P.
                  Koyah
                  Ventures LLC, Raven Partners, L.P., Koyah Microcap Partners Master
                  Fund,
                  L.P. and James M. Simmons. (3)10.8
              
              Consolidated,
                  Amended and Restated Security Agreement dated as of January 31,
                  2006, by
                  Aura Systems, Inc. for the benefit of Koyah Leverage Partners,
                  L.P., Koyah
                  Partners, L.P. Koyah Ventures LLC, Raven Partners, L.P., and Koyah
                  Microcap Partners Master Fund, L.P. (3)10.9
              
              Consolidated,
                  Amended and Restated Stock Pledge Agreement dated as of January
                  31, 2006,
                  by Aura Systems, Inc. for the benefit of Koyah Leverage Partners,
                  L.P.,
                  Koyah Partners, L.P. Koyah Ventures LLC, Raven Partners, L.P.,
                  and Koyah
                  Microcap Partners Master Fund, L.P. (3)10.10
              
              Amended
                  and Restated Intercreditor Agreement dated as of January 31, 2006,
                  by and
                  among Aura Systems, Inc., Koyah Leverage Partners, L.P., Koyah
                  Partners,
                  L.P. Koyah Ventures LLC, Raven Partners, L.P., and Koyah Microcap
                  Partners
                  Master Fund, L.P. (3)10.11
              
              Amended
                  and Restated Promissory Note dated January 31, 2006, by Aura Systems,
                  Inc.
                  in favor of Raven Partners, L.P. (3)10.12
              
              Amended
                  and Restated Promissory Note dated January 31, 2006, by Aura Systems,
                  Inc.
                  in favor of Koyah Ventures, LLC (3)10.13
              
              Consolidated,
                  Amended and Restated Promissory Note dated January 31, 2006, by
                  Aura
                  Systems, Inc. in favor of Koyah Partners, L.P. (3)10.14
              
              Consolidated,
                  Amended and Restated Promissory Note dated January 31, 2006, by
                  Aura
                  Systems, Inc. in favor of Koyah Microcap Partners Master Fund,
                  L.P.
                  (3)10.15
              
              Consolidated,
                  Amended and Restated Promissory Note dated January 31, 2006, by
                  Aura
                  Systems, Inc. in favor of Koyah Leverage Partners, L.P.
                  (3)10.16
              
              Lease
                  between Aura Systems Inc., and Alliance Commercial Partners
                  (3)10.17
              
              Lease
                  between Aura Systems Inc., and Derek Lidow as Trustee for the Lidow
                  Family
                  Trust and Alexander Lidow (3)14.1
              
              Code
                  of Ethics (3)31.1
              
              CEO
                  Certification pursuant to Section 906 of the Sarbanes-Oxley Act
                  of
                  200231.2
              
              CFO
                  Certification pursuant to Section 906 of the Sarbanes-Oxley Act
                  of
                  200232.1
              
              Certification
                  pursuant to 18 U.S.C. Section 1350(1)
              
              Incorporated
                  by reference from the Company's Report on Amendment to Form 8-A
                  filed with
                  the SEC on January 31, 2006.(2)
              
              Incorporated
                  by reference from the Company’s Current Report on Form 8-K filed with the
                  SEC on January 20, 2006.(3)
              
              Incorporated
                  by reference from the Company’s Report on Form 10-K filed with the SEC for
                  the year ended February 28,
                  2005.
  35
  SIGNATURES
  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:
              March
                  25, 2008By:
              /s/
                  Melvin GagermanMelvin
                  GagermanChief
                  Executive Officer
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the date indicated.
  Signatures
              
              Title
              
              Date/s/
                  Melvin Gagerman
              
              Chief
                  Executive Officer, Acting Chief Financial Officer Director and
                  Chairman of
                  the Board (Principal Executive Officer, Principal Financial Officer,
                  Principal Accounting Officer)
              
              March
                  25, 2008Melvin
                  Gagerman/s/
                  Arthur Schwartz
              
              Director
              
              March
                  25, 2008Arthur
                  Schwartz/s/
                  Salvador Diaz-Verson, Jr
              
              Director
              
              March
                  25, 2008Salvador
                  Diaz-Verson, Jr.Director
              
              March
                  25, 2008/s/
                  Maurice ZeitlinMaurice
                  ZeitlinDirector
              
              March
                  25, 2008/s/
                  Warren BreslowWarren
                  BreslowDirector
              
              March
                  25, 2008




36




**Index
      to Consolidated Financial Statements**




Independent
                Auditors' Reports on Consolidated Financial Statements and Financial
                Statement Schedule
            
            
            F-1Consolidated
                Financial Statements of Aura Systems, Inc. and
                Subsidiaries:Consolidated
                Balance Sheets - February 28, 2006 and February 28, 2005
            
            
            F-3Consolidated
                Statements of Operations - Years ended February 28, 2006, February
                28,
                2005 and February 29, 2004
            
            
            F-4Consolidated
                Statements of Stockholders' Equity (Deficit) - Years ended February
                28,
                2006, February 28, 2005 and February 29, 2004
            
            
            F-5Consolidated
                Statements of Cash Flows - Years ended February 28, 2006, February
                28,
                2005 and February 29, 2004
            
            
            F-6
                to F-7Notes
                to Consolidated Financial Statements
            
            
            F-8
                to F-27Consolidated
                Financial Statement Schedule II: Valuation and Qualifying
                Accounts
            
            
            F-28
                to F-29




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









**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders




Aura
      Systems, Inc. and subsidiaries




We
      have
      audited the accompanying consolidated balance sheets of Aura Systems, Inc.
      (a
      Delaware corporation) and subsidiaries as of February 28, 2006 and February
      28,
      2005, and the related consolidated statements of operations, stockholders'
      equity (deficit), and cash flows for each of the two years for the period ended
      February 28, 2006. These financial statements are the responsibility of the
      Company's management. Our responsibility is to express an opinion on these
      financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Aura Systems, Inc. and
      subsidiaries as of February 28, 2006 and February 28, 2005, and the results
      of
      their operations and their cash flows for each of the three years in the period
      ended February 28, 2006 in conformity with accounting principles generally
      accepted in the United States of America.




The
          accompanying consolidated financial statements have been prepared assuming
          that
          the Company will continue as a going concern. As discussed in Note 2 to
          the
          consolidated financial statements, the Company has generated significant
          losses
          from operations and defaulted on certain debt obligations. The Company
          filed for
          reorganization under Chapter 11 of the U.S. Bankruptcy Code, in the United
          States Bankruptcy Court, Central District of California, (Case Number LA
          05-24550-SB). They secured a Debtor in Possession (“DIP”) loan. They submitted a
          reorganization plan that was approved by the court and voted and approved
          by the
          DIP lenders, the secured creditors, the unsecured creditors, the shareholders
          and the new money investors. 254,127 additional shares were issued to Yair
          Ben
          Mosche, David Maimon and Eli Melech Lowey to settle their claims in excess
          of
          the bankruptcy court approval. All of the outstanding litigation and disputes
          were settled during the bankruptcy. The real estate was sold to an unrelated
          third party in December 2005 for gross proceeds of $8,750,000. After
          satisfaction of the mortgage liabilities and payment of the costs of the
          sale,
          approximately $2.9 million was due to the Company. From this amount, $1.9
          million was paid to the minority shareholder, approximately $470,000 was
          used to
          satisfy outstanding legal bills, and the balance of $595,000 was received
          by the
          Company in March of 2006. All disputes regarding the real estate were settled.
          The Company emerged from the Chapter 11 effective January 31,
          2006.





/s/
      Kabani & Company, Inc.


**Certified
      Public Accountants**





Los
      Angeles, California


June
      15,
      2007




F-1


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders
 Aura
        Systems, Inc. and subsidiaries
 
 We
        have
        audited the accompanying consolidated statements of operations, stockholders’
equity (deficit), and cash flows for the year ended February 29, 2004 of
        Aura
        Systems, Inc. (a Delaware corporation) and subsidiaries. Our audit also included
        the financial statement schedule of Aura Systems, Inc. and subsidiaries listed
        in Item 15(a). These financial statements and the financial statement schedule
        are the responsibility of the Company's management. Our responsibility is
        to
        express an opinion on these financial statements based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our 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 results of operations of Aura Systems, Inc.
        and
        subsidiaries and their cash flows for the year ended February 29, 2004, in
        conformity with U.S. generally accepted accounting principles. Also, in our
        opinion, the related financial statement schedule, when considered in relation
        to the basic consolidated financial statements taken as a whole, presents
        fairly
        in all material respects the information set forth therein.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. The Company has generated
        significant losses from operations and defaulted on certain debt obligations.
        These factors raise substantial doubt about the Company’s ability to continue as
        a going concern. The consolidated financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.
 
 SINGER
        LEWAK GREENBAUM & GOLDSTEIN LLP
 
 Los
        Angeles, California
 July
        10,
        2004




F-2




**CONSOLIDATED
      BALANCE SHEETS**




**February
                28, 2006**
            
            **February
                28, 2005****ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            472,482
            
            $
            61,376Accounts
                receivable, net of allowance for doubtful accounts of $164,241 and
                $178,134
            
            
            87,808
            
            
            637,436Current
                inventories
            
            
            615,000
            
            
            802,003Other
                receivables
            
            
            2,654,864
            
            
            -Other
                current assets
            
            
            69,690
            
            
            696,157Total
                current assets
            
            
            3,899,844
            
            
            2,196,972Property,
                plant, and equipment, net
            
            
            26,669
            
            
            6,588,996Non-current
                inventories net of allowance for obsolete inventories of $2,967,751
                and
                $4,038,047
            
            
            3,964,864
            
            
            4,519,809Total
                assets
            
            $
            7,891,377
            
            $
            13,305,777**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                liabilitiesAccounts
                payable
            
            $
            590,577
            
            $
            3,322,137Current
                portion of notes payable (including $0 and $1,495,525 to related
                parties)
            
            
            48,766
            
            
            8,730,982Convertible
                notes payable
            
            
            -
            
            
            5,686,527Accrued
                expenses
            
            
            528,192
            
            
            2,376,346Derivative
                liability
            
            
            -
            
            
            16,254,502Deferred
                income
            
            
            164,625
            
            
            164,625Total
                current liabilities
            
            
            1,332,160
            
            
            36,535,119Notes
                payable, net of current portion
            
            
            2,476,234
            
            
            -Total
                liabilities
            
            
            3,808,394
            
            
            36,535,119Minority
                interest in consolidated subsidiary
            
            
            
            
            
            653,891Commitments
                and contingenciesStockholders'
                equity (deficit)Series
                A Convertible, Redeemable Preferred Stock, $0.005 par value, 1,500,000
                shares authorized, 591,110 shares issued and outstanding at February
                28,
                2005
            
            
            -
            
            
            2,956Series
                B Convertible, Preferred Stock, par value $0.005 per share, 2,650,798
                shares issued and outstanding at February 28, 2005
            
            
            -
            
            
            9,857Common
                stock, $0.0001par value, 50,000,000 shares authorized, 24,282,710
                and
                1,300,172 issued and outstanding at February 28, 2006 and February
                28,
                2005
            
            
            2,428
            
            
            130Committedcommon stock, 64,917 shares at February 28, 2005
            
            
            -
            
            
            3,102,958Additional
                paid-in capital
            
            
            343,073,025
            
            
            318,857,824Accumulated
                deficit
            
            
            (338,992,470
            )
            
            (345,856,958
            )Total
                stockholders' equity (deficit)
            
            
            4,082,983
            
            
            (23,883,233
            )Total
                liabilities and stockholders' equity
            
            $
            7,891,377
            
            $
            13,305,777




The
      accompanying notes are an integral part of these financial
      statements




F-3




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




For
      the
      Years Ended February 28, 2006, February 28, 2005, and February 29,
      2004




2006
            
            2005
            
            2004Net
                revenues
            
            $
            1,756,105
            
            $
            2,525,431
            
            $
            1,864,325Cost
                of goods sold
            
            
            614,327
            
            
            1,573,116
            
            
            934,769Inventory
                write down
            
            
            439,188
            
            
            2,088,703
            
            
            550,968Gross
                profit
            
            
            702,590
            
            
            (1,136,388
            )
            
            (378,588
            )Operating
                expensesEngineering,
                research and development
            
            
            1,483,247
            
            
            2,482,668
            
            
            2,135,061Selling,
                general, and administrative
            
            
            5,867,388
            
            
            6,886,542
            
            
            7,191,925Legal
                settlements
            
            
            267,726
            
            
            2,765,192
            
            
            -Impairment
                losses on long-lived assets
            
            
            -
            
            
            544,510
            
            
            2,000,398Total
                operating expenses
            
            
            7,618,361
            
            
            12,678,912
            
            
            11,327,384Loss
                from operations
            
            
            (6,915,771
            )
            
            (13,815,300
            )
            
            (10,948,796
            )Other
                income (expense)Impairment
                of investments
            
            
            -
            
            
            (286,061
            )
            
            (500,000
            )Loss
                on sale of minority interest in Aura Realty
            
            
            -
            
            
            -
            
            
            (231,000
            )Gain
                on sale of assets
            
            
            2,446,798
            
            
            -
            
            
            201,061Interest
                income , net
            
            
            (6,602,020
            )
            
            (18,965,852
            )
            
            (2,409,732
            )Other
                income (expense), net
            
            
            (50,000
            )
            
            166,345
            
            
            (129,337
            )Change
                in derivative liability
            
            
            16,254,502
            
            
            4,622,235
            
            
            -Bankruptcy
                Settlements
            
            
            1,730,979
            
            
            -
            
            
            -Total
                other income (expense)
            
            
            13,780,259
            
            
            (14,463,333
            )
            
            (3,069,008
            )Net
                Income (Loss) before minority interest in subsidiary and
                extraordinary item
            
            
            6,864,488
            
            
            (28,278,633
            )
            
            (14,017,804
            )Minority
                interest
            
            
            -
            
            
            3,970
            
            
            365,514Extraordinary
                item:Gain
                on extinguishment of debt, net of income taxes of $0
            
            
            -
            
            
            -
            
            
            67,415Net
                income (loss) before preferred stock dividend
            
            $
            6,864,488
            
            $
            (28,274,663
            )
            $
            (13,584,875
            )Preferred
                stock dividend
            
            
            -
            
            
            525,377
            
            
            -Net
                Income (Loss) applicable to common shareholders
            
            $
            6,864,488
            
            $
            (28,800,040
            )
            $
            (13,584,875
            )Basic
                and diluted income (loss) per share
            
            $
            2.24
            
            $
            (22.35
            )
            $
            (10.65
            )Weighted-average
                shares outstanding
            
            
            3,063,216
            
            
            1,288,114
            
            
            1,276,056




The
      accompanying notes are an integral part of these financial
      statements




F-4




**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)**




Preferred
                Stock Shares
            
            Preferred
                Stock Amount
            
            Common
              Stock
                Shares
            
            Common
              Stock
                Amount
            
            Committed
                Common
              Stock
            
            Additional
                Paid-In Capital
            
            Accumulated
              Deficit
            
            Total
                Stockholders' Equity (Deficit)Balance,
                February 28, 2003
            
            
            
            
            
            
            
            
            1,276,056
            
            $
            127
            
            $
            3,102,958
            
            $
            305,429,688
            
            $
            (303,820,597
            )
            $
            4,712,176Warrants
                issued to debt holders
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            494,265
            
            
            
            
            
            494,265Beneficial
                conversion feature on convertible notes payable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            827,375
            
            
            
            
            
            827,375Issuance
                of Series A Preferred StockIn
                private placements
            
            
            57,090
            
            $
            285
            
            
            
            
            
            
            
            
            
            
            
            259,215
            
            
            
            
            
            259,500For
                conversion of notes payable
            
            
            534,020
            
            
            2,671
            
            
            
            
            
            
            
            
            
            
            
            3,674,464
            
            
            
            
            
            3,677,135Prior
                period adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (348,555
            )
            
            348,555
            
            
            -Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (13,584,875
            )
            
            (13,584,875
            )Balance,
                February 29, 2004
            
            
            591,110
            
            $
            2,956
            
            
            1,276,056
            
            $
            127
            
            $
            3,102,958
            
            $
            310,336,452
            
            $
            (317,056,918
            )
            $
            (3,614,425
            )Reclassify
                prior year warrant expense as liability
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,617,403
            )
            
            
            
            
            (1,617,403
            )Penalty
                shares issued on global settlement
            
            
            
            
            
            
            
            
            24,116
            
            
            3
            
            
            
            
            
            292,269
            
            
            
            
            
            292,272Issuance
                of Series B for note conversion
            
            
            500,000
            
            
            2,500
            
            
            
            
            
            
            
            
            
            
            
            2,497,500
            
            
            
            
            
            2,500,000Issuance
                of Series B for global settlement
            
            
            91,717
            
            
            459
            
            
            
            
            
            
            
            
            
            
            
            458,124
            
            
            
            
            
            458,583Issuance
                of Series B creditors settlement
            
            
            290,311
            
            
            1,452
            
            
            
            
            
            
            
            
            
            
            
            1,450,103
            
            
            
            
            
            1,451,555Series
                B issued in private placement
            
            
            1,089,245
            
            
            5,446
            
            
            
            
            
            
            
            
            
            
            
            5,440,779
            
            
            
            
            
            5,446,225Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (28,800,040
            )
            
            (28,800,040
            )Balance,
                February 28, 2005
            
            
            2,562,383
            
            $
            12,813
            
            
            1,300,172
            
            $
            130
            
            $
            3,102,958
            
            $
            318,857,824
            
            $
            (345,856,958
            )
            $
            (23,883,233
            )Series
                B issued in private placements
            
            
            26,963
            
            
            123
            
            
            
            
            
            
            
            
            
            
            
            123,338
            
            
            
            
            
            123,461Cancel
                preferred stock
            
            
            (2,589,346
            )
            
            (12,936
            )
            
            
            
            
            
            
            
            
            
            
            (13,903,525
            )
            
            
            
            
            (13,916,461
            )Cancel
                common stock
            
            
            
            
            
            
            
            
            (1,300,172
            )
            
            (130
            )
            
            (3,102,958
            )
            
            (305,077,637
            )
            
            
            
            
            (308,180,725
            )Stock
                issued for cancelled common stock
            
            
            
            
            
            
            
            
            1,300,172
            
            
            130
            
            
            
            
            
            308,180,595
            
            
            
            
            
            308,180,725Stock
                issued for cancelled preferred stock
            
            
            
            
            
            
            
            
            3,319,403
            
            
            332
            
            
            
            
            
            13,916,129
            
            
            
            
            
            13,916,461Stock
                issued for additional claims
            
            
            
            
            
            
            
            
            254,127
            
            
            25
            
            
            
            
            
            856,324
            
            
            
            
            
            856,349Stock
                issued in exchange for secured debt
            
            
            
            
            
            
            
            
            1,134,000
            
            
            113
            
            
            
            
            
            2,899,887
            
            
            
            
            
            2,900,000Stock
                issued for new money contribution
            
            
            
            
            
            
            
            
            3,349,500
            
            
            335
            
            
            
            
            
            2,952,665
            
            
            
            
            
            2,953,000Stock
                issued for DIP financing
            
            
            
            
            
            
            
            
            6,065,699
            
            
            607
            
            
            
            
            
            4,063,411
            
            
            
            
            
            4,064,018Stock
                issued for administrative claims
            
            
            
            
            
            
            
            
            2,766,786
            
            
            277
            
            
            
            
            
            -277
            
            
            
            
            
            -Penalty
                shares issued on new money contribution
            
            
            
            
            
            
            
            
            837,375
            
            
            84
            
            
            
            
            
            -84
            
            
            
            
            
            -Stock
                issued for unsecured debt
            
            
            
            
            
            
            
            
            4,611,247
            
            
            461
            
            
            
            
            
            8,125,478
            
            
            
            
            
            8,125,939Stock
                issued for legal settlements
            
            
            
            
            
            
            
            
            644,401
            
            
            64
            
            
            
            
            
            1,135,501
            
            
            
            
            
            1,135,565Issuance
                of warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            943,396
            
            
            
            
            
            943,396Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,864,488
            
            
            6,864,488Balance,
                February 28, 2006
            
            
            -
            
            
            -
            
            
            24,282,710
            
            $
            2,428
            
            
            -
            
            $
            343,073,025
            
            $
            (338,992,470
            )
            $
            4,082,983




F-5




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**For
      the Years Ended February 28, 2006, February 28, 2005 and February 29,
      2004**




2006
            
            2005
            
            2004Cash
                flows from operating activitiesNet
                income (loss)
            
            $
            6,864,488
            
            $
            (28,800,040
            )
            $
            (13,584,876
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
                and amortization
            
            
            65,091
            
            
            416,161
            
            
            571,734Gain
                on disposition of assets
            
            
            (2,446,798
            )
            
            
            
            
            (201,061
            )Loss
                on sale of minority interest in Aura Realty
            
            
            -
            
            
            -
            
            
            231,000Change
                in allowance for doubtful accounts
            
            
            88,682
            
            
            32,134
            
            
            -Reserve
                for Note Receivable
            
            
            -
            
            
            -
            
            
            2,042,340Change
                in reserve for inventory obsolescence
            
            
            439,188
            
            
            2,088,703
            
            
            550,968Impairment
                of long-lived assets and investments
            
            
            -
            
            
            830,571
            
            
            2,500,397Gain
                on extinguishment of debt
            
            
            (1,730,979
            )
            
            (17,221
            )
            
            (65,594
            )Minority
                interest in net income of consolidated subsidiary
            
            
            -
            
            
            (3,970
            )
            
            (365,514
            )Operating
                expense charged for warrants issues-
            
            
            943,396
            
            
            
            
            
            -Stock
                options issued as consulting expense
            
            
            -
            
            
            -
            
            
            -Change
                in derivative liability
            
            
            (16,254,502
            )
            
            (4,622,235
            )
            
            -Beneficial
                conversion feature on convertible debt
            
            
            3,801,457
            
            
            19,259,334
            
            
            1,090,639Operating
                expenses satisfied with stock
            
            
            300,000
            
            
            750,855
            
            
            -(Increase)
                decrease inAccounts
                receivable
            
            
            460,946
            
            
            12,732
            
            
            (271,585
            )Inventories
            
            
            302,760
            
            
            895,628
            
            
            130,614Other
                current assets
            
            
            626,467
            
            
            (437,068
            )
            
            (92,500
            )Other
                assets
            
            
            -
            
            
            594,271
            
            
            131,364Increase
                (decrease) inAccounts
                payable and accrued expenses
            
            
            1,974,022
            
            
            2,156,666
            
            
            609,437Deferred
                income
            
            
            -
            
            
            3,750
            
            
            375Net
                cash used in operating activities
            
            
            (4,565,782
            )
            
            (6,839,729
            )
            
            (6,722,272
            )Cash
                flows from investing activitiesPayments
                received on notes receivable
            
            
            -
            
            
            -
            
            
            174,053Purchase
                of property, plant, and equipment
            
            
            -
            
            
            -
            
            
            (24,684
            )Proceeds
                from sale of investments
            
            
            -
            
            
            -
            
            
            415,000Net
                cash provided by (used in) investing activities
            
            
            -
            
            
            -
            
            
            564,369




F-6




CONSOLIDATED
      STATEMENTS OF CASH FLOWS




2006
            
            2005
            
            2004Cash
                flows from financing activitiesProceeds
                from notes payable and convertible notes payable
            
            
            -
            
            
            2,150,000
            
            $
            6,366,080Payments
                on notes payable
            
            
            (103,727
            )
            
            (778,320
            )
            
            (548,170
            )Net
                proceeds from issuance of preferred stock
            
            
            123,461
            
            
            5,446,225
            
            
            259,500Net
                proceeds from issuance of common stock
            
            
            4,957,154
            
            
            -
            
            
            -Net
                cash provided by financing activities
            
            
            4,976,888
            
            
            6,817,905
            
            
            6,077,410Net
                increase (decrease) in cash and cash equivalents
            
            
            411,106
            
            
            (21,824
            )
            
            (80,493
            )Cash
                and cash equivalents, beginning of year
            
            
            61,376
            
            
            83,200
            
            
            163,693Cash
                and cash equivalents, end of year
            
            
            472,482
            
            $
            61,376
            
            $
            83,200Supplemental
                disclosures of cash flow informationInterest
                paid
            
            $
            550,255
            
            $
            674,383
            
            $
            324,872Income
                taxes paid
            
            $
            -
            
            $
            -
            
            $
            -




Supplemental
      schedule of non-cash financing and investing activities:




During
      the year ended February 28, 2006, we:


·
              issued
                  1,134,000 shares of common stock upon conversion of $2,900,000
                  of secured
                  debt
  ·
              issued
                  2,766,786 shares of common stock for administrative claims arising
                  out of
                  the bankruptcy filing
  ·
              issued
                  837,375 shares of common stock as penalty shares for failure to
                  timely
                  file a registration statement
  ·
              issued
                  4,611,247 shares of common stock in satisfaction of $8,125,939
                  of
                  unsecured debt
  ·
              issued
                  644,401 shares of common stock as legal settlements
  During
        the year ended February 28, 2005, we:
  ·
              issued
                  290,311 shares of Series B convertible preferred stock in satisfaction
                  of
                  $ 1,451,555 in liabilities issued 500,000 shares of Series B convertible
                  preferred stock upon conversion of $2,500,000 of note payable
  During
          the year ended February 29, 2004, the Company:
 ·
                  issued
                      $125,811 of convertible notes payable in satisfaction of $125,811
                      in
                      contractual obligations arising from the sale of the convertible
                      notes
                      payable.


F-7




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      1 - ORGANIZATION AND OPERATIONS**




**General**




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




**Chapter
      11 reorganization**




On
      June
      24, 2005 we filed for reorganization under Chapter 11 of the U.S. Bankruptcy
      Code, in the United States Bankruptcy Court, Central District of California,
      (Case Number LA 05-24550-SB). We secured a Debtor in Possession (“DIP”) loan
      from Blue Collar Films LLC (“BCF”) for one million dollars and secured an
      additional $1.2 million DIP loan from AGP Lender LLC. In addition a group of
      individual investors provided an additional $1.16 million in DIP financing.
      We
      submitted a reorganization plan that was approved by the court and voted and
      approved by the DIP lenders, the secured creditors, the unsecured creditors,
      the
      shareholders and the new money investors. Under the reorganization plan (i)
      the
      secured creditor retained $2.5 million in a secured note payable over 48 months
      at 7% annual interest with the first payment starting 12 months after the
      reorganization, (ii) the Series B Preferred Stock holders received new common
      shares calculated by dividing the total cash invested in the Series B Placement
      by $3.37, (iii) the Series A Preferred Stock holders converted their 1.8 Series
      A Preferred Stock for one new common share, (iv) the common shareholders
      converted 338 of their shares for one new share, and (v) the DIP loans converted
      their loans into approximately 6.07 million new shares of common stock, and
      (vi)
      all the unsecured creditors received new shares of common stock valued at one
      share per $1.75 in claim. An additional 5.89 million shares of common stock
      were
      issued for the new money and reorganization related fees.254,127 additional
      shares were issued to shareholders to settle their claims in excess of the
      bankruptcy court approval.




All
      of
      the outstanding litigation and disputes were settled during the bankruptcy.
      The
      real estate was sold to an unrelated third party in December 2005 for gross
      proceeds of $8,750,000. After satisfaction of the mortgage liabilities and
      payment of the costs of the sale, approximately $2.9 million was due us. From
      this amount, $1.9 million was paid to the minority shareholder, approximately
      $470,000 was used to satisfy outstanding legal bills, and the balance of
      $595,000 was received by the Company in March of 2006. All disputes regarding
      the real estate were settled.




We
      emerged from the Chapter 11 effective January 31, 2006.




**NOTE
      2 - GOING CONCERN**




Our
      accompanying consolidated financial statements have been prepared on the basis
      that we are a going concern, which contemplates the realization of assets and
      satisfaction of liabilities in the normal course of business.




Our
      long-term ability to continue as a going concern is dependent upon the
      successful achievement of profitable operations and the ability to generate
      sufficient cash from operations and financing sources to meet our obligations.
      The consolidated financial statements do not include any adjustments to reflect
      the possible future effects on the recoverability and classification of assets
      or the amount and classification of liabilities that may result from our
      possible inability to continue as a going concern. We are currently seeking
      to
      raise additional financing and anticipate being able to increase our sales
      in
      order to achieve positive cash flow.




F-8




**NOTE
      3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Principles
      of Consolidation**




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




**Revenue
      Recognition**




The
      Company’s revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue.




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




**Comprehensive
      Income**




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




**Cash
      and Cash Equivalents**




Cash
      and
      equivalents include cash in hand and cash in time deposits, certificates of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less. We maintain cash deposits at multiple banks located in
      California. Deposits at each bank are insured by the Federal Deposit Insurance
      Corporation up to $100,000. At February 28, 2005, there were no uninsured
      portions of the balances. We have not experienced any losses in such accounts
      and believe we are not exposed to any significant risk on cash and cash
      equivalents.




**Accounts
      Receivable**




Accounts
      receivable consist primarily of amounts due from customers. We have provided
      for
      an allowance for doubtful accounts, which we believe to be sufficient to account
      for all uncollectible amounts.




**Inventories**




Inventories
      are valued at the lower of cost (first-in, first-out) or market. Due to
      continuing lower than projected sales, we are holding inventories in excess
      of
      what we expect to sell in the next fiscal year. As of February 28, 2006 and
      February 28, 2005 $3,964,864, and $4,519,809, respectively, of inventories
      have
      been classified as long-term assets. (See Note 4.)




F-9




**Property,
      Plant, and Equipment**




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




Buildings
            
            40
                yearsMachinery
                and equipment
            
            5
                to 10 yearsFurniture
                and fixtures
            
            7
                years




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




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




**Long-Term
      Investments**




We
      account for all investments where we hold less than a 20% voting interest,
      cannot exercise significant influence, and where the fair market value of those
      securities is not readily determinable under the cost basis. Investments in
      voting interests between 20% and 50% where we can exercise significant influence
      are accounted for under the equity method of accounting, and investments greater
      than 50% are generally consolidated for the purposes of financial reporting.
      As
      we do not hold a sufficient interest in our investments to exercise significant
      influence and the fair market value of the investments are not readily
      determinable, long-term investments have been accounted for under the cost
      method. A decline in the value of any investment below cost that is deemed
      other
      than temporary is charged to earnings. As of February 28, 2006, we have impaired
      all of our long-term investments.




**Patents
      and Trademarks**




We
      capitalize the cost of obtaining or acquiring patents and trademarks.
      Amortization of patent and trademark costs is provided for by the straight-line
      method over the shorter of the legal or estimated economic life. Amortization
      expense was $ 0, $657,728, and $187,028 for the years ended February 28, 2006,
      February 28, 2005 and February 29, 2004, respectively. Accumulated amortization
      was $1,228,061 as of February 28, 2006 and 2005. If a patent or trademark is
      rejected, abandoned, or otherwise invalidated, the unamortized cost is expensed
      in that period. During fiscal 2004, we recorded a $2,000,398 long-lived asset
      impairment charge resulting from the write off of some of our patents and
      trademarks. We reevaluated our intentions with regard to its patents and
      trademarks related to products outside our core business and wrote-off the
      carrying value of patents not related to products in production. In fiscal
      2005,
      due to the continued low sales volume, we wrote off the carrying value of the
      balance of our patents .




**Valuation
      of Long-Lived Assets**




We
      review
      long-lived assets and identifiable intangibles in accordance with SFAS No.
      144,
      "Accounting for the Impairment or Disposal of Long-Lived Assets," on at least
      an
      annual basis or whenever events or circumstances indicate that the carrying
      amount of such assets may not be fully recoverable. During the year ended
      February 28, 2005, we recorded asset impairment charges on certain of our
      long-lived assets (see Note 7).




F-10




**Stock-Based
      Compensation**




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




Opinion
      No. 25, "Accounting for Stock Issued to Employees," to account for stock-based
      compensation. We have elected to use the implicit value based method and to
      disclose the pro forma effect of using the fair value based method to account
      for its stock-based compensation.






If
      we 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, our net loss and loss per share would be reduced to the pro forma
      amounts indicated below for the years ended February 28, 2006, February 28,
      2005
      and February 29, 2004:




2006
            
            2005
            
            2004Net
                income (loss), as reported
            
            $
            6,864,488
            
            $
            (28,800,040
            )
            $
            (13,584,875
            )Intrinsic
                value expense
            
            
            
            
            
            
            
            
            -Stock-based
                employee compensation expense determined under fair value presentation
                for
                all options
            
            
            -
            
            
            -
            
            
            (1,965,275
            )Pro
                forma net income (loss)
            
            $
            6,864,488
            
            $
            (28,800,040
            )
            $
            (15,550,150
            )Basic
                income (loss) per common share:As
                reported
            
            $
            2.24
            
            $
            (21.64
            )
            $
            (10.65
            )Pro
                forma
            
            $
            2.24
            
            $
            (21.64
            )
            $
            (12.19
            )




For
      purposes of computing the pro forma disclosures required by SFAS No. 123, the
      fair value of each option granted to employees and directors is estimated using
      the Black-Scholes option-pricing model with the following weighted-average
      assumptions for the year ended February 29, 2004: dividend yields of 0%,
      expected volatility of 98%, risk-free interest rate of 1.7%, and expected lives
      of 2.0 years. There were no options granted during the years ended February
      28,
      2005 and 2006.




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




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




**Fair
      Value of Financial Instruments**




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




F-11




**Minority
      Interest**




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




**Advertising
      Expense**




Advertising
      costs are charged to expense as incurred and were immaterial for the years
      ended
      February 28, 2006, February 28, 2005 and February 29, 2004.




**Research
      and Development**




Research
      and development costs are expensed as incurred. These costs include the expenses
      incurred in the development of the 200amp ECU, the Tamgen (dual generator),
      and
      the eight inch generator.




**Income
      Taxes**




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




We
      have
      significant income tax net operating losses; however, due to the uncertainty
      of
      the realizability of the related deferred tax asset, a reserve equal to the
      amount of deferred income taxes has been established at February 28, 2006 and
      February 28, 2005.




**Loss
      per Share**




The
      consolidated net loss per common share is based on the weighted-average number
      of common shares outstanding during the year.




**Estimates**




The
      preparation of financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period. Actual results could differ from those estimates.




**Major
      Customers**




During
      the year ended February 28, 2006, we conducted business with four customers
      whose sales comprised 24% of net sales. As of February 28, 2006, two customers
      accounted for 87% of net accounts receivable. During the year ended February
      2,
      2005, we conducted business with four customers whose sales comprised 44% of
      net
      sales. As of February 28, 2005, four customers accounted for 54% of net accounts
      receivable.




F-12




**Recently
      Issued Accounting Pronouncements**




In
      December 2004, the FASB issued SFAS No. 153, entitled Exchanges of Nonmonetary
      Assets -- An Amendment of APB Opinion No.29. SFAS No. 153 amends Opinion 29
      to
      eliminate the exception for nonmonetary exchanges of nonmonetary assets that
      do
      not have commercial substance. A nonmonetary exchange has commercial substance
      if the future cash flows of the entity are expected to change significantly
      as a
      result of the exchange. The adoption of SFAS 153 did not impact the consolidated
      financial statements.





In
      December 2004, the FASB issued SFAS No. 123 (Revised), entitled Share-Based
      Payment. This revised Statement eliminates the alternative to use APB Opinion
      No. 25's intrinsic value method of accounting that was provided in SFAS No.
      123
      as originally issued. Under Opinion 25, issuing stock options to employees
      generally resulted in recognition of no compensation cost. This Statement
      requires entities to recognize the cost of employee services received in
      exchange for awards of equity instruments based on the grant-date fair value
      of
      those awards. For public companies that file as a small business issuer, this
      Statement is effective as of the beginning of the first interim or annual
      reporting period that begins after December 15, 2005. The adoption of SFAS
      123
      (Revised) will not impact the consolidated financial statements as the Company
      has not granted any equity instruments to employees.





In
      May
      2005, the FASB issued SFAS No. 154, entitled Accounting Changes and Error
      Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3.
      This
      Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement
      No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
      the requirements for the accounting for and reporting of a change in accounting
      principle. This Statement applies to all voluntary changes in accounting
      principle. It also applies to changes required by an accounting pronouncement
      in the
      unusual instance that the pronouncement does not include specific transition
      provisions. Opinion 20 previously required that most voluntary changes in
      accounting principle be recognized by including in net income of the period
      of
      the change the cumulative effect of changing to the new accounting principle.
      This Statement requires retrospective application to prior periods' financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. This Statement defines retrospective application as the application
      of a
      different accounting principle to prior accounting periods as if that principle
      had always been used or as the adjustment of previously issued financial
      statements to reflect a change in the reporting entity. This Statement also
      redefines restatement as the revising of previously issued financial statements
      to reflect the correction of an error. The adoption of SFAS 154 did not impact
      the consolidated financial statements.





In
      February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
      Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities".  SFAS No. 155, permits fair value remeasurement for any
      hybrid financial instrument that contains an embedded derivative that otherwise
      would require bifurcation, clarifies which interest-only strips and
      principal-only strips are not subject to the requirements of SFAS No. 133,
      establishes a requirement to evaluate interest in securitized financial assets
      to identify interests that are freestanding derivatives or that are hybrid
      financial instruments that contain an embedded derivative requiring bifurcation,
      clarifies that concentrations of credit risk in the form of subordination are
      not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition
      on the qualifying special-purpose entity from holding a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument.  This statement is effective for all financial
      instruments acquired or issued after the beginning of the Company's first fiscal
      year that begins after September 15, 2006.  The Company has not evaluated
      the impact of this pronouncement in its financial statements.





In
      March
      2006 FASB issued SFAS 156 'Accounting for Servicing of Financial Assets' this
      Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities, with respect to the
      accounting for separately recognized servicing assets and servicing liabilities.
      This Statement:




1.
      Requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract.





F-13




2.
      Requires all separately recognized servicing assets and servicing liabilities
      to
      be initially measured at fair value, if practicable.




3.
      Permits an entity to choose 'Amortization method' or 'Fair value measurement
      method' for each class of separately recognized servicing assets and servicing
      liabilities.




4.
      At its
      initial adoption, permits a one-time reclassification of available-for-sale
      securities to trading securities by entities with recognized servicing rights,
      without calling into question the treatment of other available-for-sale
      securities under Statement 115, provided that the available-for-sale securities
      are identified in some manner as offsetting the entity's exposure to changes
      in
      fair value of servicing assets or servicing liabilities that a servicer elects
      to subsequently measure at fair value.




5.
      Requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at fair value in the statement of financial position
      and
      additional disclosures for all separately recognized servicing assets and
      servicing liabilities.




This
      Statement is effective as of the beginning of the Company's first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not have a significant impact on the consolidated financial
      statements.





In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.





In
      July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
      Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an
      Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 seeks to reduce
      the diversity in practice associated with certain aspects of measuring and
      recognition in accounting for income taxes. In addition, FIN 48 requires
      expanded disclosure with respect to the uncertainty in income taxes and is
      effective as of the beginning of the 2008 fiscal year. Management is currently
      evaluating the effect of this pronouncement on financial
      statements.







In
      September 2006, FASB issued SFAS No. 158 “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
      No. 87, 88, 106, and 132(R)”. This Statement improves financial reporting by
      requiring an employer to recognize the over funded or under funded status of
      a
      defined benefit postretirement plan (other than a multiemployer plan) as an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income of a business entity or changes in unrestricted net assets
      of a not-for-profit organization. This Statement also improves financial
      reporting by requiring an employer to measure the funded status of a plan as
      of
      the date of its year-end statement of financial position, with limited
      exceptions. An employer with publicly traded equity securities is required
      to
      initially recognize the funded status of a defined benefit postretirement plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after December 15, 2006. An employer without publicly traded equity securities
      is required to recognize the funded status of a defined benefit postretirement
      plan and to provide the required disclosures as of the end of the fiscal year
      ending after June 15, 2007. However, an employer without publicly traded equity
      securities is required to disclose the following information in the notes to
      financial statements for a fiscal year ending after December 15, 2006, but
      before June 16, 2007, unless it has applied the recognition provisions of this
      Statement in preparing those financial statements:


·
              A
                  brief description of the provisions of this Statement
  F-14
  ·
              The
                  date that adoption is required
  ·
              The
                  date the employer plans to adopt the recognition provisions of
                  this
                  Statement, if earlier.
  The
        requirement to measure plan assets and benefit obligations as of the date
        of the
        employer’s fiscal year-end statement of financial position is effective for
        fiscal years ending after December 15, 2008. Management is currently evaluating
        the effect of this pronouncement on financial statements.





In
      February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
      years beginning after November 15, 2007. Early adoption is permitted subject
      to
      specific requirements outlined in the new Statement. Therefore, calendar-year
      companies may be able to adopt FAS 159 for their first quarter 2007 financial
      statements.




The
      new
      Statement allows entities to choose, at specified election dates, to measure
      eligible financial assets and liabilities at fair value that are not otherwise
      required to be measured at fair value. If a company elects the fair value option
      for an eligible item, changes in that item's fair value in subsequent reporting
      periods must be recognized in current earnings. FAS 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities. Management is currently evaluating the effect of this pronouncement
      on financial statements.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements”. This Statement amends ARB 51 to establish
      accounting and reporting standards for the noncontrolling (minority) interest
      in
      a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
      a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements. SFAS No. 160 is effective for the Company’s fiscal year
      beginning October 1, 2009. Management is currently evaluating the effect of
      this
      pronouncement on financial statements.





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
      Statement replaces SFAS No. 141, Business Combinations. This Statement retains
      the fundamental requirements in Statement 141 that the acquisition method of
      accounting (which Statement 141 called the purchase method) be used for all
      business combinations and for an acquirer to be identified for each business
      combination. This Statement also establishes principles and requirements for
      how
      the acquirer: a) recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, and any noncontrolling
      interest in the acquiree; b) recognizes and measures the goodwill acquired
      in
      the business combination or a gain from a bargain purchase and c) determines
      what information to disclose to enable users of the financial statements to
      evaluate the nature and financial effects of the business combination. SFAS
      No.
      141(R) will apply prospectively to business combinations for which the
      acquisition date is on or after Company’s fiscal year beginning October 1, 2009.
      While the Company has not yet evaluated this statement for the impact, if any,
      that SFAS No. 141(R) will have on its consolidated financial statements, the
      Company will be required to expense costs related to any acquisitions after
      September 30, 2009.





F-15




**NOTE
      4 - INVENTORIES**




Inventories
      at February 28, 2006 and February 28, 2005 consisted of the
      following:




2006
            
            2005Raw
                materials
            
            $
            2,909,930
            
            $
            3,720,204Finished
                goods
            
            
            4,637,685
            
            
            5,639,6557,547,615
            
            
            9,359,859Reserve
                for potential product obsolescence
            
            
            (2,967,751
            )
            
            (4,038,047
            )4,579,864
            
            
            5,321,812Non-current
                portion
            
            
            3,964,864
            
            
            4,519,809Current
                portion
            
            $
            615,000
            
            $
            802,003




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




Early
      in
      its AuraGen ® program,
      we determined it was most cost-effective to outsource production of components
      and subassemblies to volume-oriented manufacturers, rather than produce these
      parts in house. As a result of this decision, and based on then anticipated
      sales, we purchased, prior to fiscal 2001, a substantial inventory of components
      at volume prices, most of which was then assembled into finished
      AuraGen ® units.
      Since sales did not meet such expectations, we have been selling product from
      this inventory for several years. Management has analyzed its inventories based
      on its current business plan, current orders for future delivery, and pending
      proposals with prospective customers and has determined we do not expect to
      realize all of its inventories within the next year. The net inventories as
      of
      February 28, 2006 and February 28, 2005, which are not expected to be realized
      within a 12-month period have been reclassified as long term.




We
      assessed the net realizability of these assets, and the potential obsolescence
      of inventory. In accordance with this assessment, management has recorded a
      reserve of $2,967,751 and $4,038,047 at February 28, 2006 and February 28,
      2005,
      respectively.




**NOTE
      5 - NOTES RECEIVABLE**




In
      March
      2000, we received a $2,500,000 note bearing interest at 8% per annum and due
      on
      October 1, 2007 from the purchaser of our ceramics facility. This note was
      assigned in connection with the Aura Realty Transaction. No payments have been
      made under this note since November 2003. The remaining $2,042,340 principal
      balance of the Ceramics Note was reserved as uncollectible as of February 29,
      2004 and was included in bad debt expense in Selling, General and Administrative
      expenses in the accompanying financial statements.




F-16




**NOTE
      6 - PROPERTY, PLANT, AND EQUIPMENT**




Property,
      plant, and equipment at February 28, 2006 and February 28, 2005 consist of
      the
      following:




2006
            
            2005Land
            
            $
            0
            
            $
            3,187,997Buildings
            
            
            0
            
            
            6,408,796Machinery
                and equipment
            
            
            911,308
            
            
            1,798,485Furniture
                and fixtures
            
            
            1,509,492
            
            
            2,308,023Leasehold
                improvements
            
            
            0
            
            
            135,9352,420,800
            
            
            13,839,286Less
                accumulated depreciation and amortization
            
            
            2,394,131
            
            
            7,250,240Property,
                plant and equipment, net
            
            $
            26,669
            
            $
            6,588,996




Depreciation
      and amortization expense was $65,091, $416,161, and $641,246 for the years
      ended
      February 28, 2006, February 28, 2005 and February 29, 2004,
      respectively.




In
      December 2005, our majority owned subsidiary, Aura Realty, sold the buildings
      we
      operate in to an unrelated third party for gross proceeds of $8,750,000. After
      satisfaction of the mortgage liabilities and payment of the costs of the sale,
      approximately $2.9 million was due us. From this amount, $1.9 million was paid
      to the minority shareholder, approximately $470,000 was used to satisfy
      outstanding legal bills, and the balance of $595,000 was received by the Company
      in March of 2006. We then entered into a lease arrangement with the purchasers
      to lease one of the properties for a period of two years beginning January
      1,
      2006.




**NOTE
      7 - LONG-TERM INVESTMENTS**




We
      have
      made long-term investments in the common stock of three companies as follows:
      Aquajet-$923,835; Algo Technology-$1,348,652 and Telemac-$715,153. As of
      February 29, 2004, we had fully written off our investment in Aquajet and Algo
      Technology, and had a net book value in our Telemac investment of $286,061.
      During fiscal 2005, we wrote off the balance of our investment in Telemac and
      as
      of February 28, 2006 and 2005, we have fully written off all our long-term
      investments.




F-17




**NOTE
      8 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE**




Notes
      payable and convertible notes payable at February 28, 2006 and 2005 consisted
      of
      the following:




2006
            
            2005Note
                payable (a)
            
            $
            2,525,000
            
            $
            0Convertible
                notes payable (b)
            
            
            0
            
            
            5,061,527Convertible
                notes payable (c)
            
            
            0
            
            
            625,000Notes
                payable - buildings (d)
            
            
            0
            
            
            4,838,904Note
                payable - related party (e)
            
            
            0
            
            
            1,149,525Litigation
                payable (f)
            
            
            0
            
            
            2,742,553$
            2,525,000
            
            
            14,417,509Less
                current portion
            
            
            48,766
            
            
            14,417,509Long-term
                portion
            
            $
            2,476,234
            
            $
            -




(a)
      Represents notes payable dated January 31, 2006, bearing interest at a rate
      of
      7% per annum and secured by our intellectual property. The notes carry a term
      of
      five years with interest accruing the first twelve months, principal and
      interest payments beginning the thirteenth month, and continuing through month
      sixty.




(b) Represents
      secured notes payable (the "Secured Notes") on June 15, 2004, bearing interest
      at 10% per annum and convertible at the option of the holder into new debt
      or
      equity securities of the Company at a 20% discount to the best terms by which
      such new debt or equity is sold to any new investor. The Secured Notes may
      be
      prepaid on notice at a 15% premium. Repayment of the Secured Notes is secured
      by
      substantially of our assets (with limited exceptions). The beneficial conversion
      feature of these notes was valued at $348,555 and has been recorded as interest
      expense in the accompanying financial statements. These notes were converted
      into new secured notes payable (see (a) above) and 1,134,000 shares of common
      stock in the reorganized company as a result of the bankruptcy
      reorganization.




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




Pursuant
      to the 2004 Recapitalization Transactions, the maturity of such notes was
      extended to June 30, 2005, the conversion discount / prepayment premium was
      eliminated, and a portion of such notes were converted into Series B Preferred
      Stock .




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




F-18




(d) Notes
      payable - buildings consist of a First Trust Deed on two buildings in California
      used as our headquarters bearing interest at 7.625% per annum. A final balloon
      payment is due in fiscal 2009. In April 2003, we defaulted on these notes
      payable and, in June 2004, cured such defaults. As such, at February 28, 2003,
      these notes payable were classified as current liabilities. This note was paid
      in full upon the sale of the buildings in December, 2005.




(e) Notes
      payable - related parties consist of two separate notes: a $1,000,000 note
      payable, dated December 1, 2002, which was entered into in connection with
      the
      sale of a minority interest in Aura Realty, as more fully described in our
      Form
      10-K for the year ended February 29, 2004 as filed with the SEC (the “$1M Note”)
      and a $150,000 demand note, dated August 6, 2004, which was issued in exchange
      for a $150,000 cash advance from an employee (the $150K Note”).




The
      $1M
      Note bears interest at 12.3% per annum and is secured by a security interest
      in
      a certain note receivable. We were required to make interest only payments
      for
      the first 17 months of the term, and the $1,000,000 principal was due on May
      31,
      2004. We were unable to make the principal payment as demanded by the Purchasers
      and the note is now in default. In August 2004, one of the minority shareholders
      of Aura Realty filed a lawsuit against us seeking full payment of this Note.
      This note was paid off as a part of the settlement with Minority shareholders
      on
      the sale of the Aura Realty building during bankruptcy.




The
      $150K
      Note includes a fixed charge of $15,000 for interest, which was recorded as
      interest expense in August 2004, and is secured by our accounts receivable.
      The
      holders of the Secured Notes have subordinated their security interest in our
      accounts receivable to allow us to grant this security interest. These notes
      were converted into shares of common stock of the reorganized company as a
      result of the bankruptcy reorganization.




(f) The
      litigation payable represents the legal settlements entered into by Aura with
      various parties. These settlements call for payment terms with 8% interest
      rate
      to the plaintiffs through fiscal 2004. We are in default with respect to
      payments required under these settlements. These notes were converted into
      shares of common stock of the reorganized company as a result of the bankruptcy
      reorganization.




Future
      maturities of notes payable at February 28, 2006 are as
      follows:




Year
                Ending February 28,2007
            
            $
            48,7662008
            
            
            592,2512009
            
            
            651,8082010
            
            
            698,9272011
            
            
            533,248$
            2,525,000




F-19




**NOTE
      9 - ACCRUED EXPENSES**




Accrued
      expenses at February 28, 2006 and February 28, 2005 consisted of the
      following:




2006
            
            2005Accrued
                payroll and related expenses
            
            $
            178,170
            
            $
            352,836Accrued
                interest
            
            
            16,833
            
            
            856,662Accrued
                Litigation Settlement
            
            
            -
            
            
            550,760Other
            
            
            333,189
            
            
            840,495Total
            
            $
            528,192
            
            $
            2,600,753




**NOTE
      10 - COMMITMENTS AND CONTINGENCIES**




**Leases**




At
      February 28, 2006, we did not have any significant long-term operating leases.
      Rent expense charged to operations amounted to $858,368, $838,458, and $412,531
      for the years ended February 28, 2006, February 28, 2005 and February 29, 2004,
      respectively.




**Litigation**




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




As
      previously reported in our fiscal 2000 report on Form 10-K, we settled
      shareholder litigation in the referenced matter in January 1999. On November
      20,
      1999, the parties entered into an Amended Stipulation of Settlement, requiring
      that we make payment of $2,260,000 (plus interest) in thirty-six equal monthly
      installments of $70,350. On October 22, 2002, after we had failed to make
      certain monthly payments, Plaintiffs applied for and obtained a judgment against
      us for $935,350, representing the balance due. We have subsequently made only
      two monthly payments of $70,350 each, reducing the amount owed to $794,650
      (plus
      interest) as of February 28, 2005. Subsequent to year end, the bankruptcy court
      (see footnote 18) approved the settlement of this claim in the amount of
      approximately $820,000 as an unsecured claim, to be satisfied by the issuance
      of
      approximately 465,000 shares of common stock in the recapitalized company.
      Plaintiffs appealed the settlement claiming they are a secured creditor entitled
      to full payment in cash over a period of five years. The appellate court upheld
      the settlement provisions, and Plaintiffs have appealed this decision. The
      appeal is pending.




**NOTE
      11 - STOCKHOLDERS' EQUITY**




**Series
      A Convertible, Redeemable Preferred Stock**




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




F-20




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




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




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


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




On
      March
      26, 2004, our Board of Directors authorized 8,000,000 shares of Series B
      convertible preferred stock (the “Series B”) with a par value of $0.001. Each
      Series B share is convertible into common stock at $0.02 per share. The Series
      B
      can be converted at any time at the option of the holder, provided there are
      sufficient common shares authorized.




The
      Series B has a liquidation preference of $5 per share. In addition, the holders
      of the Series B are entitled to receive cumulative dividends at a rate of 8%
      per
      annum. Dividends are payable in arrears on the first day of each quarter,
      commencing 90 days after the issuance date. Dividends are payable in cash,
      or,
      at the option of a majority of the holders of the Series B, in shares of common
      stock.




During
      the year ended February 28, 2005, we issued 1,971,273 shares of Series
      B:




1,089,245
      of these shares were issued for cash totaling $5,446,225




500,000
      of these shares were issued in conversion of $2,500,000 of notes
      payable




91,717
      of
      these shares were issued as part of the global settlement totaling
      $458,583




290,311
      of these shares were issued in settlement of liabilities totaling
      $1,451,555




During
      the year ended February 28, 2006, we issued 26,963 shares of Series B Preferred
      Stock for consideration of $123,461.




F-21




As
      part
      of the reorganization plan, all Series A and Series B Preferred Stock has been
      converted into common stock of the reorganized company. The Series A Preferred
      Stock holders received one new share of common stock for each 1.8 Series A
      Preferred share. The Series B Preferred Stock holders received new common shares
      calculated by dividing the total cash invested in the Series B Placement by
      $3.37. As of February 28, 2006, there is no outstanding preferred
      stock.




**Common
      Stock**




At
      February 28, 2006, February 28, 2005, and February 29, 2004, we had 50,000,000
      shares of $0.0001 par value common stock authorized for issuance. During the
      year ended February 28, 2006 we issued 24,282,710 shares of common stock in
      the
      reorganized company as follows:


·
              1,134,000
                  shares upon conversion of $2,900,000 of secured debt
  ·
              2,766,786
                  shares for administrative claims arising out of the bankruptcy
                  filing
  ·
              837,375
                  shares as penalty shares for failure to timely file a registration
                  statement
  ·
              4,611,247
                  shares in satisfaction of $8,125,939 of unsecured
                  debt
  ·
              1,300,172
                  shares in exchange for the old common
                  stock
  ·
              3,
                  319,403 shares for cancelled preferred
                  stock
  ·
              254,127
                  additional shares to settle claims in excess of the bankruptcy
                  approval
  ·
              6,065,699
                  shares for DIP financing
  ·
              3,349,500
                  shares for new money contribution
  ·
              644,401
                  shares issued for legal settlements




As
      described below, as of February 28, 2005 we had commitments to issue, in
      exchange for consideration already received, approximately 65,000 shares of
      common stock. This is in addition to outstanding stock options, warrants and
      convertible securities.




During
      the year ended February 28, 2005, we issued 24,116 common shares as penalty
      shares on the shares purchased in the real estate transaction, for failure
      to
      file a registration statement.




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




As
      part
      of the reorganization plan, all shares of outstanding common stock were
      cancelled and exchanged for common stock in the reorganized company in the
      ratio
      of one share of new common stock for every 338 shares of old common stock.
      Prior
      years shares outstanding, common stock, additional paid in capital, warrants
      outstanding and warrant exercise prices have been adjusted to reflect the
      effects of the reverse split.




**Director
      Stock Options**




We
      have
      granted nonqualified stock options to certain directors. Options were granted
      at
      fair market value at the date of grant, vested immediately, and were exercisable
      at any time within a 10-year period from the date of grant. These options were
      cancelled as part of the Reorganization Plan as of February 28,
      2006.




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




Number
                of Shares
            
            Weighted-Average
              Exercise
                PriceOutstanding,
                February 29, 2004 and February 28, 2005
            
            
            1,331
            
            $
            696.28
                - 777.40Exercisable,
                February 28, 2005
            
            
            1,331
            
            $
            696.28
                - 777.40Cancelled,
                February 28, 2006
            
            
            (1,331
            )
            $
            696.28
                - 777.40Outstanding,
                February 28, 2006
            
            
            0




F-22




**Employee
      Stock Options**




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




During
      the year ended February 29, 2004, we:


·
              issued
                  stock options to employees to purchase 29,959 of our common stock,
                  5,551
                  of these shares were a reallocation of shares granted to employees
                  in
                  January 2003 that terminated their employment prior to vesting
                  in these
                  options.
  ·
              issued
                  stock options to various Board members and consultants to purchase
                  35,946
                  of our common stock.




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




As
      part
      of the reorganization plan, all outstanding employee options in both plans
      were
      cancelled.




Activity
      in the employee stock option plans was as follows:




1989
                Plan
            
            2000
                PlanNumber
                of Shares
            
            Weighted-Average
                Exercise Price
            
            Number
                of Shares
            
            Weighted-Average
                Exercise PriceOutstanding,
                February 28, 2003
            
            
            2,860
            
            $
            605.02-$2,470.78
            
            
            114,307
            
            $
            104.78
                - 216.32Granted
            
            
            -
            
            $
            -
            
            
            84,841
            
            $
            16.90
                - 40.56Canceled
            
            
            (748
            )
            $
            605.02-$2,470.78
            
            
            (5,656
            )
            $
            27.04
                - 216.32Outstanding,
                February 28, 2004
            
            
            2,112
            
            $
            605.02-$2,470.78
            
            
            163,906
            
            $
            16.90
                - 216.32Exercisable,
                February 28, 2004
            
            
            2,112
            
            $
            605.02-$2,470.78
            
            
            155,428
            
            $
            16.90
                - 216.32Outstanding,
                February 28, 2005
            
            
            2,112
            
            $
            605.02-$2,470.78
            
            
            163,906
            
            $
            16.90
                - 216.32Exercisable,
                February 28, 2005
            
            
            2,112
            
            $
            605.02-$2,470.78
            
            
            155,428
            
            $
            16.90
                - 216.32Cancelled
            
            
            (2,112
            )
            $
            605.02-$2,470.78
            
            
            (163,906
            )
            $
            16.90
                - 216.32Outstanding,
                February 28, 2006
            
            
            0
            
            $
            -
            
            
            0
            
            $
            0




The
      exercise prices for the options outstanding at February 28, 2006, and
      information relating to these options is as follows:




Range
                of Exercise Prices
            
            Stock
                Options Outstanding
            
            Stock
                Options Exercisable
            
            Weighted-Average
                Remaining Contractual Life
            
            Weighted-Average
                Exercise Price of Options Outstanding
            
            Weighted-Average
                Exercise Price of Options ExercisableNone




F-23




**Warrants**




During
      the year ended February 29, 2004, in connection with the Intercreditor Secured
      Debt financing (see Note 9), primarily as inducements to the lenders to continue
      to provide interim funding, the issued warrants to purchase an aggregate of
      9,467 shares of common stock at a price per share of $37.18, exercisable through
      January 7, 2011. Subsequent to year-end, we issued warrants (with a net exercise
      feature) to purchase an aggregate of 30,206 shares of common stock at a price
      per share of $8.11 to the same lenders, again as inducements to continue to
      provide interim funding.




We
      agreed
      to file a registration statement with the SEC within 60 days of closing under
      the Agreement and issued 16,272 additional warrants to the Purchasers during
      fiscal 2004 because we failed to do (see Note 4). These warrants were valued
      at
      $231,000, using the Black-Scholes pricing model, which is recorded in the
      accompanying fiscal 2004 financial statements as an additional loss on the
      sale
      of the minority interest in Aura Realty.




At
      February 29, 2004 and February 28, 2003, there were warrants outstanding to
      purchase 130,909 **** and
      144,842 shares, respectively, of our common stock, exercisable at an average
      price of $148.72 and $128.44, respectively, per share.




As
      of
      February 29, 2004, the aggregate number of outstanding options, warrants, and
      common share equivalents was significantly in excess of the authorized but
      unissued number of shares of our common stock. Management intends to seek
      shareholder approval of an increase in the Company’s authorized shares
      sufficient to satisfy all existing commitments and create available shares
      for
      potential future investments. However, such approval was not granted. Hence,
      management determined that the value of the warrants was required to be
      classified as a liability under the provisions of EITF 00-19 - Accounting for
      Derivative Financial Instruments Indexed To and Potentially Settled In a
      Company’s Own Stock. As of February 28, 2005, the value of the warrants has been
      classified as a liability.




Activity
      in issued and outstanding warrants was as follows:




Number
                of Shares
            
            Exercise
                PricesOutstanding,
                February 28, 2003
            
            
            155,637
            
            $
            50.07
                - 858.52Issued
            
            
            34,911
            
            $
            16.90
                - 50.07Exercised
            
            
            -
            
            $
            -Expired
            
            
            59,934
            
            $
            67.60
                - 162.24Outstanding,
                February 29, 2004
            
            
            130,909
            
            $
            16.90
                - 858.52Issued
            
            
            443,786
            
            $
            6.76
                - 16.90Exercised
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Outstanding,
                February 28, 2005
            
            
            574,684
            
            $
            6.76
                - 858.52Cancelled
            
            
            (574,684
            )
            $
            6.76
                - 858.52Issued
            
            
            5,022,948
            
            $
            2.00-3.00Outstanding,
                February 28, 2006
            
            
            5,022,948
            
            $
            2.00-3.00




As
      part
      of the reorganization plan, all warrants outstanding as of January 31, 2006
      were
      cancelled.




During
      the year ended February 28, 2006, we issued 5,022,945 warrants with a grant
      date
      of January 31, 2006, as part of the reorganization plan. The warrants are
      exercisable for a period of five years from the date of grant and are
      exercisable at a price of $3.00 the first twelve months, $3.50 the second twelve
      months, and $4.00 thereafter.




F-24




The
      exercise prices for the warrants outstanding at February 28, 2006, and
      information relating to these warrants is as follows:




Range
                of Exercise Prices
            
            Stock
                Warrants Outstanding
            
            Stock
                Warrants Exercisable
            
            Weighted-Average
                Remaining Contractual Life
            
            Weighted-Average
                Exercise Price of Warrants Outstanding
            
            Weighted-Average
                Exercise Price of Warrants Exercisable
            
            Intrinsic
                Value$3.00
            
            5,022,945
            
            5,022,945
            
            59
                months
            
            $3.00
            
            $3.00
            
            $0.00




Assumptions
      for the Black-Scholes calculation for the warrants are as follows: Volatility
      -
      114%, Term - 5 years, Discount rate - 5.25%.




**NOTE
      12 - INCOME TAXES**




We
      have
      not incurred any income tax expense since inception. The actual tax benefit
      differs from the expected tax benefit computed by applying the United States
      federal corporate tax rate of 34% to loss before income taxes as follows for
      the
      years ended February 28, 2006 and February 28, 2005 and February 29, 2004:




2006
            
            2005
            
            2004Expected
                tax benefit
            
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %State
                income taxes, net of federal benefit
            
            
            6.0
            
            
            6.0
            
            
            6.0Changes
                in valuation allowance
            
            
            (40.0
            )
            
            (40.0
            )
            
            (40.0
            )Total
            
            
            -
            %
            
            -
            %
            
            -
            %




The
      following table summarizes the significant components of our deferred tax asset
      at February 28, 2006 and February 28, 2005:




2006
            
            2005Deferred
                tax assetProperty,
                plant, and equipment and other
            
            
            0
            
            
            6,350,000Net
                operating loss carryforward
            
            
            115,500,000
            
            
            113,000,000Valuation
                allowance
            
            
            (115,500,000
            )
            
            (119,350,000
            )Net
                deferred tax asset
            
            $
            -
            
            $
            -




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




A
      provision for income taxes has not been provided in these financial statements
      due to the net loss. At February 28, 2006, we had operating loss carryforwards
      of approximately $288,700,000, which expire through 2021.




F-25




**NOTE
      13 - EMPLOYEE BENEFIT PLANS**




We
      sponsor two employee benefit plans: The Employee Stock Ownership Plan (the
      "ESOP") and a 401(k) plan.




The
      ESOP
      is a qualified discretionary employee stock ownership plan that covers
      substantially all employees. We did not make any contributions to the ESOP
      during the years ended February 28, 2006, February 28, 2005 and February 29,
      2004.




We
      sponsor a voluntary, defined, contribution 401(k) plan. The plan provides for
      salary reduction contributions by employees and matching contributions by us
      of
      20% of the first 7% of the employees' pre-tax contributions. The matching
      contributions included in selling, general, and administrative expenses were
      $10,552, $17,863 and $21,253 for the years ended February 28, 2006, February
      28,
      2005 and February 29, 2004, respectively.




**NOTE
      14 - SEGMENT INFORMATION**




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




Total
      net
      revenues from customer geographical segments are as follows for the years ended
      February 28, 2006 and February 28, 2005 and February 29, 2004:




2006
            
            2005
            
            2004United
                States
            
            $
            1,583,509
            
            $
            2,420,136
            
            $
            1,841,000Canada
            
            
            105,243
            
            
            43,523
            
            
            1,000Europe
            
            
            7,246
            
            
            7,826
            
            
            3,000Asia
            
            
            60,107
            
            
            53,946
            
            
            19,000Total
            
            $
            1,756,105
            
            $
            2,525,431
            
            $
            1,864,000




**NOTE
      16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)**




The
      following tables list our quarterly financial information for the years ended
      February 28, 2006, February 28, 2005 and February 29, 2004:




2006


First
              Quarter
            
            Second
              Quarter
            
            Third
              Quarter
            
            Fourth
              Quarter
            
            Total
              YearNet
                revenues
            
            $
            530,703
            
            $
            274,007
            
            $
            574,231
            
            $
            377,164
            
            $
            1,756,105Gross
                profit
            
            $
            335,651
            
            $
            171,949
            
            $
            395,431
            
            $
            (200,441
            )
            $
            702,590Loss
                from operations
            
            $
            (1,249,927
            )
            $
            (1,237,150
            )
            $
            (1,143,838
            )
            $
            (3,284,856
            )
            $
            (6,915,771
            )Net
                income (loss)
            
            $
            (5,262,942
            )
            $
            18,445,502
            
            $
            (1,418,084
            )
            $
            (4,751,380
            )
            $
            6,864,488Basic
                and diluted income (loss) per share
            
            $
            (4.06
            )
            $
            13.52
            
            $
            (1.09
            )
            $
            (6.13
            )
            $
            2.24




F-26




2005


First
              Quarter
            
            Second
              Quarter
            
            Third
              Quarter
            
            Fourth
              Quarter
            
            Total
              YearNet
                revenues
            
            $
            685,834
            
            $
            599,443
            
            $
            631,774
            
            $
            608,380
            
            $
            2,525,431Gross
                profit
            
            $
            416,836
            
            $
            470,024
            
            $
            377,300
            
            $
            (2,400,548
            )
            $
            (1,136,388
            )Loss
                from operations
            
            $
            (1,491,525
            )
            $
            (3,810,130
            )
            $
            (2,024,533
            )
            $
            (5,664,112
            )
            $
            (13,815,300
            )Net
                loss
            
            $
            (2,571,476
            )
            $
            (11,690,737
            )
            $
            (16,504,722
            )
            $
            1,966,895
            
            $
            (28,800,040
            )Basic
                and diluted loss per share
            
            $
            (2.03
            )
            $
            (9.13
            )
            $
            (12.84
            )
            $
            3.43
            
            $
            (22.35
            )




2004


First
              Quarter
            
            Second
              Quarter
            
            Third
              Quarter
            
            Fourth
              Quarter
            
            Total
              YearNet
                revenues
            
            $
            97,612
            
            $
            519,679
            
            $
            726,692
            
            $
            520,342
            
            $
            1,864,325Gross
                profit
            
            
            30,829
            
            
            230,730
            
            
            424,229
            
            
            276,574
            
            
            378,588Loss
                from operations
            
            
            (1,643,011
            )
            
            (3,271,243
            )
            
            (1,429,628
            )
            
            (4,605,143
            )
            
            (10,948,796
            )Net
                loss
            
            
            (2,225,284
            )
            
            (3,536,450
            )
            
            (1,886,177
            )
            
            (5,936,964
            )
            
            (13,584,875
            )Basic
                and diluted loss per share
            
            $
            (1.69
            )
            $
            (2.70
            )
            $
            (1.69
            )
            $
            (4.57
            )
            $
            (10.65
            )




**NOTE
      18 - SUBSEQUENT EVENTS**




*Capital
      Transactions*




In
      the
      year ended February 28, 2007, we issued 4,412,928 shares of common stock for
      net
      proceeds of $3,965,156.




In
      the
      nine months ended November 30, 2007, we issued 5,614,650 shares of common stock
      for net proceeds of $5,377,08. We also issued 183,532 shares of common stock
      upon conversion of $183,532 of secured notes payable.




F-27




SUPPLEMENTAL
      INFORMATION




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**






To
      the
      Board of Directors and Stockholders




Aura
      Systems, Inc. and subsidiaries




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




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




/s/Kabani
      & Company, Inc.


**Certified
      Public Accountants**





Los
      Angeles, California


June
      15,
      2007




F-28




**VALUATION
      AND QUALIFYING ACCOUNTS - SCHEDULE II**




**Balance,
                Beginning of Year**
            
            **Additions
                charged to Operations**
            
            **Deductions**
              **from**
              **Reserve**
            
            **Balance,**
              **End
                of**
              **Year****Reserve
                for doubtful accounts (see Note 3 and 6)**February
                28, 2006
            
            $
            2,220,474
            
            
            
            
            $
            2,056,233
            
            $
            164,241February
                28, 2005
            
            $
            2,188,340
            
            $
            86,537
            
            $
            54,403
            
            $
            2,220,474February
                29, 2004
            
            $
            244,310
            
            $
            2,042,340
            
            $
            98,310
            
            $
            2,188,340**Reserve
                for obsolete inventories (see Note 5)**February
                28, 2006
            
            $
            4,038,047
            
            
            
            
            $
            1,070,296
            
            $
            2,967,751February
                28, 2005
            
            $
            2,032,000
            
            $
            2,006,047
            
            $
            -
            
            $
            4,038,047February
                29, 2004
            
            $
            1,678,000
            
            $
            354,000
            
            $
            -
            
            $
            2,032,000**Reserve
                for investment (see Note 8)**February
                28, 2006
            
            $
            2,987,640
            
            $
            -
            
            $
            -
            
            $
            2,987,640February
                28, 2005
            
            $
            2,701,579
            
            $
            286,061
            
            $
            -
            
            $
            2,987,640February
                29, 2004
            
            $
            2,522,487
            
            $
            500,000
            
            $
            320,908
            
            $
            2,701,579





F-29