**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,
      2007


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, 2006 the aggregate market value of the voting stock held by non-affiliates
      of the Registrant was approximately $44 million. The aggregate market value
      has
      been computed by reference to the last trading price of the stock on August
      31,
      2006.




On
      January 31, 2008, the Registrant had 36,670,820 shares of common stock
      outstanding.




2




**TABLE
      OF CONTENTS**


**PART
                  I**ITEM
                  1. BUSINESS
              
              5ITEM
                  1A. RISK FACTORS
              
              12ITEM
                  2. PROPERTIES
              
              16ITEM
                  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
              
              17ITEM
                  6. SELECTED FINANCIAL DATA
              
              19**PART
                  II**ITEM
                  7. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS
              
              20ITEM
                  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              
              26ITEM
                  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
              
              27ITEM
                  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND
                  FINANCIAL DISCLOSURE
              
              27ITEM
                  9A. CONTROLS AND PROCEDURES
              
              27ITEM
                  9B. OTHER INFORMATION
              
              27**PART
                  III**ITEM
                  10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
              
              28ITEM
                  11. EXECUTIVE COMPENSATION
              
              30ITEM
                  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS
                  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              
              39ITEM
                  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              
              41ITEM
                  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
              
              42**PART
                  IV**ITEM
                  15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
              
              43SIGNATURES
              
              45




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 Securities and Exchange
      Commission (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 Statement 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
      alternating current (“AC”) power as well as simultaneous direct current (“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 the AuraGen 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,
      a
      Delaware corporation, was founded in 1987 and, until 1992, was primarily engaged
      in supplying defense related technologies to classified military
      programs . In
      1992,
      we acquired the Electronic Ceramic Facility (the Ceramic Operations). This
      facility produced piezoelectric 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 Electric
      Components (“Delphi”), which developed and built microelectronic circuits and
      components. In 1994, we started NewCom, Inc. (“NewCom”) to manufacture and sell
      computer modems, sound cards and other multimedia components. By the mid -
      1990s, the Company was organized into four divisions (i) AuraSound (the “Speaker
      Operations”) - 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, and (iv) Aura Display- using the AMA technology to develop very large
      very
      bright display systems. By 1998, the Company had three facilities in California,
      a facility in New Hope, Minnesota, and facilities in Osaka, Japan, Kuala Lumpur,
      Malaysia, and New Delhi, India. During this period the Company was investing
      large amounts of capital into the development of the AuraGen ® .




In
      1997,
      the Company spun off NewCom as a public company, with the Company retaining
      approximately 60% ownership. NewCom owed the Company approximately $40 million
      that was due 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 built - 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.




5




During
      1999, the Company sold the Speaker Operations, the Ceramic Operations, 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.




**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 is the
      ECU,
      which 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 is
      pure sine wave with total harmonic distortion  of less than 2.1% and is
      available in both 120 VAC and or 240 VAC.  In addition, the power generated
      on all models can be partitioned to provide simultaneous AC and 14 or 28 volts
      of 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 VIPER (the military
      version of the AuraGen ® system
      includes as an option a complete power management system which (i) monitors
      in
      real time 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, emergency/rescue and 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.
      and others, we estimate the annual gross North American mobile power generation
      market in 2008 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 that are not incorporated
                into a vehicle and require external fuel, either gasoline or diesel,
                in
                order to generate electricity. Gensets (i) are generally noisy and
                cumbersome to transport because of their weight and size, (ii) 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 vehicle’s engine is used as the prime mover. All
                  high-output alternators provide their rated power at very high
                  RPM and
                  significantly less power at lower RPM. In addition high-output
                  alternators
                  are generally only 30% efficient at the low RPM range and increase
                  to 50%
                  efficiency at the high end of the RPM range.The
                  power generated by high-output 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 RPMs, in order to get significant power,
                  a
                  throttle controller is used to speed-up the engine.


·
            Inverters,Inverters are devices that invert battery DC to AC. Inverters as
                mobile
                power generators are traditionally used in low power requirements,
                typically less than 2,500 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 in excess of 6,000
                watts.
                Dynamic inverters introduce significant stresses on both the batteries
                and
                alternators, which causes 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 transformer winding provides
                battery charging so that 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
                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 an under-the-hood environment (200oF)
                active cooling must be added, 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
                Cells.Fuel cells are 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. The most
                widely deployed fuel cells cost about $4,500 perkilowatt.




·
            Batteries.
                Batteries convert stored chemical energy to electrical
                energy.




**Competition**




The
      industry in which we operate is competitive. The primary competition for the
      AuraGen ® is the
      Genset industry, 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, Bosch, Nippon Densu, Hitachi, Mitsubishi and
      Prestelite.




There
      are
      many inverter manufacturers; some of the better-known are, Trace Engineering,
      Vanner, and Xentrex.




Most
      of
      our competitors have greater financial, technical, and marketing resources
      than
      the Company, have larger budgets for research, new product development and
      marketing, and have long-standing customer relationships. We 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 market the AuraGen ® .




7




The
      AuraGen ® uses new
      technology and has only been available in the marketplace for a few years.
      As
      described below, 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. OEMs and large fleet users also
      typically require considerable time to make changes to their planning and
      production.




Because
      of our limited financial and staff resources, we have focused our sales and
      marketing activities to a few industrial and military segments. In particular,
      we have focused on selling to the U.S. military, including the U.S. Coast Guard
      (the “USCG”), homeland security agencies and emergency/rescue operations, such
      as the Federal Emergency Management Agency.




More
      recently we expanded our focus and are now marketing to companies in the oil
      and
      gas segment, state and local governments, in particular, the Department of
      Transportation (“DOT”), and in the recreational boating industry.




**Competitive
      Advantages of the AuraGen** **®**




We
      believe the AuraGen ® is a
      superior product to all of its competition 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 solution. 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 such
      as the AuraGen ® .




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 major industrial companies have approved the
      AuraGen ® for
      purchase.




Thousands
      of AuraGen ® units
      are currently being used for multiple applications and in all types of operating
      environments, providing a good sample set for reliability analysis. The results
      show very low failure rates, which 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, in use by the special forces and other combat
      forces, has been air-drop-certified by the U.S. Army and has been, and is,
      successfully deployed in Operation Enduring Freedom and Operation Iraqi Freedom.




The
      AuraGen ® system
      passed all of the Underwriters Laboratories (“UL”) testing in 2002 and 2003. In
      late 2004 and early 2005, the U.S. Marine Corps successfully tested the VIPER
      for safety and other operational capabilities at the Aberdeen Test grounds.




**Target
      Markets**




After
      the
      Company emerged from Chapter 11 reorganization under new management, our sales
      and marketing activities were expanded to include the following
      markets.




Military,
      Homeland Security Administration and Other Federal Agencies




We
      believe the VIPER 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 VIPER’s power
      management system, provides 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 three
      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, and numerous units of
      special forces and regular army are using the VIPER in both Iraq and
      Afghanistan. The Department of Defense issued a report to Congress in August
      2006, which 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
      various 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 recreational boats with a length of 25 to 50 feet. The
      National Oceanic and Atmospheric Administration tested the AuraGen ® on the
“Magna Spirit”, a research vessel, for 3,000 miles on the open ocean and
      reported flawless performance. The USCG tested the VIPER for three years before
      choosing it to power 190 new patrol boats. The United States Navy also tested
      the VIPER for over 10,000 nautical miles with flawless performance. All of
      these
      organizations are leaders in the 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, or if, such required certification will be completed.




Oil
      and Gas Industry




The
      oil
      and gas industry is a heavy user 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, there is a need for very large power to start inductive loads such
      as compressors, fans and electric motors. Typically the starting power required
      is known as lock rotor and can easily reach 30,000 watts. The
      AuraGen ® ICS
      design and architecture is such that it can easily support these power levels
      for the 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’s ® ability
      to provide high wattage, start-up power is critical for this application, since
      a typical refrigeration system requires a two to four horsepower compressor.
      Such compressors require 20,000 to 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 of these organizations have started to use the
      AuraGen ® .
      Recently the Red Cross has used the AuraGen ® to
      power
      its communication needs in support of disaster relief during Hurricane Katrina
      and the wildfires 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**




We
      assemble and test the AuraGen ® at our
      27,000 square foot facility in El Segundo, California, with components that
      are
      produced by various suppliers. 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. We plan to expand our manufacturing and
      warehouse capacity during the first quarter of fiscal 2008 with a new facility
      in the Atlanta, Georgia area. The new facility will be no less than 50,000
      square feet and will provide enough capacity to handle our projected business
      for the next few years. The new facility will use the experience learned over
      the last few years to trim the manufacturing process and to improve throughput.
      When the new facility comes on line our production capacity will be 24,000
      units
      per year.




9




Early
      in
      our AuraGen ® program,
      we determined it was most cost-effective to outsource production of components
      and sub-assemblies to volume-oriented manufacturers, rather than produce these
      parts in-house. As a result of this decision, and based on then anticipated
      sales, prior to fiscal 2001 we purchased, a substantial inventory of components
      and sub-assemblies at volume prices. Since sales did not meet our expectations,
      we have been assembling, testing and selling product from this inventory for
      several years. Many of the components and sub-assemblies are mechanical in
      nature, do not deteriorate, and are readily usable for all of our
      AuraGen ® models.
      Some of the sub-assembly units are in the form of ECUs 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.




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,
      we
      have renewed our relationships with a number of our old suppliers and are
      developing relationships with others. To ensure quality and reliability in
      the
      field, we use highly qualified suppliers, the majority of which are ISO 9002
      compliant.




**Distribution
      and Product Support**




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 PTO
      applications.




**Research
      and Development**




From
      fiscal 2002 through fiscal 2005 we reduced substantially all research and
      development activities due to our weakened financial condition. Although we
      believe that ongoing research and development 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, 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 research and development, as all costs are being minimized
      while
      we seek to maintain solvency and attain profitability.




When
      we
      emerged from Chapter 11 reorganization, we started to rebuild our research
      and
      development team. We have introduced and started to ship our dual and Tamgen
      systems, which 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 watts
      system 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.
      In
      addition, we plan to start developing electric motors based on the AuraGen
      technology with the focus of this development on the 1⁄2 to 10 horsepower segment
      of the industry.




**Patents
      and Intellectual Property**




Our
      intellectual property portfolio consists of trademarks, proprietary know-how
      and
      patents.




In
      the
      area of electromagnetic technology, we have 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 three to four, which, when incorporated
      into mechanical devices, could result in a significant reduction in size and
      cost of production for the same performance.




10




The
      applications of these technological advances are in machines used every day
      by
      industrial, commercial and consumers. We have applied technology to 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 those patents, four are focused directly on the
      AuraGen ® ,
      seven
      are basic magnetic actuation, two are for control systems associated with
      controlling the magnetic fields in different configurations and sixteen are
      focused on the EVA application.




The
      sixteen (16) patents associated with the EVA application cover the
      implementation of a controlled magnetic field as applied to linear motors.
      Many
      of the same techniques are implemented into the AuraGen ® control
      systems and, in particular, the control of the high power board used in the
      new
      AuraGen ® inverter
      mode, which uses many elements from the EVA application.




**Areas
      of AuraGen** **®** **Technology Innovation:**




We
      hold
      the following patents: Nos. 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.




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 are key components of this innovation.




Control
      System




This
      system separates the power generation from the power delivery by introducing
      a
      400 VDC buss. 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 buss. The control
      system must balance all the timing to effect zero voltage change to the buss
      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.




Bi-Directional
      Power Supply (“BDP”)




The
      patented ICS system developed by Aura provides a new capability in power
      systems. The BDP allows a system to use multiple sources of power
      simultaneously. 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, 2007, we employed 47 persons. We are not a party to any collective
      bargaining agreements .




**Significant
      Customers**




During
      the year ended February 28, 2007, we conducted business with two customers
      whose
      sales comprised 24% of our net sales. As of February 28, 2007, three customers
      accounted for 50% of our net accounts receivable.




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




**Backlog**




As
      of
      January 30, 2008, we had a backlog of approximately $5.3 million. Of this
      amount, approximately $4.2 million is for delivery after the 2008 fiscal year
      Approximately $4 million of this backlog is subject to cancellation or
      renegotiation at the convenience of the government. We had no material backlog
      at the prior year corresponding date.




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 November 30, 2007. 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 have been 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. 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, 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 sales
      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.




***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 have a material adverse affect on
      our
      business, results of operations and financial condition.





12




***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. 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
      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 than we do, 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 us. 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 use by competitors. Our
      efforts to protect our proprietary rights may not prevent 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, and there can be no assurance that others will not develop
      or acquire equivalent expertise or develop products that render our current
      or
      future products noncompetitive or obsolete.




Litigation
      regarding intellectual property rights could be time-consuming and expensive
      and
      could divert our technical and management personnel from their work. We cannot
      assure you that such litigation expenses will not occur 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.




Competition
      for key employees is intense, and we cannot assure you that we will be able
      to
      retain our key employees or that we will be able to attract, assimilate and
      retain other highly qualified personnel in the future. While we may enter into
      agreements with our employees regarding patents, confidentiality and related
      matters, we do 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.




13




***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:




-
            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, 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 our common stock
      on the NASD, Inc. OTC Bulletin Board (the “OTCBB”). From February 2005 through
      the date of the filing of this report, we failed to timely file quarterly
      reports on Form 10-Q and Annual Reports on Form 10-K. This delay was also caused
      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 our delinquent SEC filings. As of the date of the filing of
      this
      report , all of our delinquent filings have been made and we are now eligible
      for re-listing on the OTCBB, subject to meeting their other requirements.
      However, we cannot assure you that our common stock will be listed on the OTCBB.
      Continued listing on the OTCBB and other U.S. exchanges requires that we timely
      file periodic SEC reports. Our failure to remain timely in our filings,
      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.





14





***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 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 OTC Bulletin Board 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 SEC 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. As
      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.




***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.




15





***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**




Until
      December 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 production
      of our AuraGen ® product.
      These properties were encumbered by a deed of trust securing a note in the
      original principal amount of $5.4 million, secured by our headquarters and
      manufacturing facilities.




During
      fiscal 2003, we sold a minority interest in Aura Realty. During fiscal 2004,
      we
      defaulted on payments under the note. 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.
      At that time we leased the smaller facility for a term of two years, 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**




Except
      as
      described below, we are not a party to any material pending legal proceedings.




**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 the end of fiscal 2005, the
      bankruptcy court in our Chapter 11 proceeding (In re Aura Systems, Inc., United
      States Bankruptcy Court, Central District of California, Case Number LA
      05-24550-SB), approved the settlement of this claim in the amount of
      approximately $820,000 as an unsecured claim under our Chapter 11 Plan of
      Reorganization. As an unsecured claim the Plan provides for the claim to be
      satisfied by the issuance of approximately 465,000 shares of common stock in
      the
      reorganized company. Plaintiffs appealed the ruling of the bankruptcy court
      to
      the District Court of Appeals claiming they were a secured creditor under the
      Plan of Reorganization, and therefore entitled to full payment in cash over
      a
      period of five years. The appellate court upheld the ruling of the bankruptcy
      court, and Plaintiffs have appealed this decision to the Ninth Circuit Court
      of
      Appeals. The appeal is pending.




**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 2007.




16




**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 February 2006 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 3,303
      stockholders of record as of January 15, 2008. Stock prices for Fiscal 2006
      have
      been adjusted to reflect the 1 for 338 reverse split effective upon our exit
      from bankruptcy on January 31, 2006.




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




Period
            
            High
            
            LowFiscal
                2007First
                Quarter ended May 31, 2006
            
            $
            3.25
            
            $
            0.55Second
                Quarter ended August 31, 2006
            
            $
            0.90
            
            $
            0.53Third
                Quarter ended November 30, 2006
            
            $
            0.80
            
            $
            0.75Fourth
                Quarter ended February 28, 2007
            
            $
            1.63
            
            $
            0.65




On
      January 15, 2008, the reported closing sales price for our common stock was
      $2.28.




**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 the Series
      A Preferred Stock and the Series B Preferred Stock were converted into common
      stock.




**Sales
      of Unregistered Securities**




During
      the three months ended February 28, 2007, we sold 2,620,991 shares of our common
      stock to private investors for proceeds of $2,385,105.




All
      such
      securities were issued and sold in reliance on the exemption from registration
      contained in Section 4(2) of the Securities Act of 1933, and the certificates
      representing such securities contain a restrictive legend reflecting the
      limitations on future transfer of those securities. The offer and sale of these
      securities was made without public solicitation or advertising. The investors
      represented to us that they were knowledgeable and sophisticated, and were
      experienced in business and financial matters so as to be capable of evaluating
      an investment in our securities and were an “accredited investor” within the
      meaning of Regulation D promulgated under the Securities Act of 1933. Each
      of
      these investors was afforded full access to information regarding our
      business.




17




**Repurchases
      of Equity Securities**




We
      did
      not repurchase any shares of our common stock during the fourth quarter of
      fiscal 2007.




**Stock
      Performance Graph**




The
      following graph compares the cumulative total stockholder return of the Company
      with the cumulative total return on the NASDAQ Stock Market Index (U.S.) and
      the
      S&P Small Cap Industrial 600 Index † .
      The
      Comparisons in the graph are required by the Securities and Exchange Commission
      and are not intended to forecast or be indicative of possible future performance
      of the Company’s common stock.




**COMPARISON
      OF FIVE YEAR CUMULATIVE TOTAL RETURN***




AMONG
      AURA SYSTEMS, INCORPORATED, THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE S
&
P SMALL CAP INDUSTRIAL INDEX









$100
      INVESTED ON 2/28/2002 IN STOCK OR INDEX-INCLUDING REINVESTMENT OF
      DIVIDENDS.FISCAL YEAR ENDING FEBRUARY 28




18




Cumulative
      Total Return and Year-to-Year Percent Return




Feb-02
            Feb-03
            Feb-04
            Feb-05
            Feb-06
            Feb-07AURA
                SYSTEMS, INC.
            Cum
                ret
            $
                100
            $
                20.63
            $
                18.19
            $
                11.20
            $
                3.36
            $
                1.71Y-Y
                %ROI
            
            -79
            -12
            -38
            -70
            -49NASDAQ
                STOCK MARKET INDEX (U.S.)
            Cum
                ret
            $
                100
            $
                74.19
            $
                112.60
            $
                113.81
            $
                126.55
            $
                134.03Y-Y
                %ROI
            
            -26
            52
            1
            11
            6S
                & P SC INDUSTRIAL 600
            Cum
                ret
            $
                100
            $
                107.05
            $
                85.44
            $
                131.85
            $
                153.69
            $
                188.82Y-Y
                %ROI
            
            7
            -20
            54
            17
            23




† The
      S&P Small Cap Industrial 600 Index is a composite of stocks including many
      in related industries to the Company’s business. The trading symbol for the
      index is ^SML.




**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, 2007
            
            February
                28, 2006
            
            February
                28,2005
            
            February
                29,2004
            
            February
                28,2003Net
                revenues
            
            $
            1,624,074
            
            $
            1,756,105
            
            $
            2,525,431
            
            $
            1,864,325
            
            $
            1,103,770Cost
                of goods sold
            
            $
            745,060
            
            $
            614,327
            
            $
            1,573,116
            
            $
            934,769
            
            $
            571,099Inventory
                write down
            
            $
            419,765
            
            $
            439,188
            
            $
            2,088,703
            
            $
            550,968
            
            $
            -Gross
                profit (loss)
            
            $
            459,249
            
            $
            702,590
            
            $
            (1,136,388
            )
            $
            378,588
            
            $
            532,671Expenses:Engineering,
                research & development
            
            $
            1,048,529
            
            $
            1,483,247
            
            $
            2,482,678
            
            $
            2,135,061
            
            $
            3,956,886$
            
            
            $
            
            
            $
            
            
            $Selling,
                general and administrative
            
            $
            5,200,393
            
            $
            5,867,388
            
            $
            6,061,542
            
            $
            7,191,925
            
            $
            7,374,961Class
                action litigation & other legal settlements
            
            $
            -
            
            $
            267,726
            
            $
            2,765,192
            
            $
            -
            
            $
            233,259Impairment
                losses on long-lived assets
            
            $
            -
            
            $
            -
            
            $
            544,510
            
            $
            2,000,398
            
            $
            2,300,000Severance
                expense
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            241,243Total
                expenses
            
            $
            6,248,922
            
            $
            7,618,361
            
            $
            12,678,912
            
            $
            11,327,384
            
            $
            14,106,349Loss
                from operations
            
            $
            (5,789,673
            )
            $
            (6,915,771
            )
            $
            (13,815,300
            )
            $
            (10,948,796
            )
            $
            (13,573,678
            )Other
                (income) and expense:Impairment
                of investments
            
            $
            -
            
            $
            -
            
            $
            286,061
            
            $
            500,000
            
            $
            818,019Loss
                on sale of minority interest in Aura Realty
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            231,000
            
            $
            626,676(Gain)
                loss on sale of investments/assets
            
            $
            7,750
            
            $
            (2,446,798
            )
            $
            -
            
            $
            (201,061
            )
            $
            -Interest
                expense
            
            $
            (392,977
            )
            $
            6,602,020
            
            $
            18,965,852
            
            $
            2,409,732
            
            $
            2,656,592Other
            
            $
            6,453
            
            $
            (50,000
            )
            $
            (166,345
            )
            $
            129,337
            
            $
            (362,096
            )Change
                in derivative liability
            
            $
            -
            
            $
            16,254,502
            
            $
            (4,622,235
            )
            $
            -
            
            $
            -Provision
                (benefit) for taxes
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Minority
                interest
            
            $
            -
            
            $
            -
            
            $
            (3,970
            )
            $
            (365,514
            )
            $
            14,018Gain
                on extinguishment of debt obligations, net of income taxes
            
            $
            -
            
            $
            1,730,979
            
            $
            -
            
            $
            67,415
            
            $
            1,186,014Preferred
                stock dividend
            
            $
            -
            
            $
            -
            
            $
            525,377
            
            $
            -
            
            $
            -




19




Net
                Income (loss)
            
            $
            (6,168,447
            )
            $
            6,864,488
            
            $
            (28,800,040
            )
            $
            (13,584,875
            )
            $
            (16,140,873
            )Net
                loss per common share
            
            $
            (0.25
            )
            $
            2.24
            
            $
            (22.35
            )
            $
            (10.65
            )
            $
            (13.52
            )Weighted
                average number of common shares
            
            
            25,114,154
            
            
            3,063,216
            
            
            1,288,114
            
            
            1,276,056
            
            
            1,230,365Cash/cash
                equivalents
            
            $
            1,051,259
            
            $
            472,482
            
            $
            61,376
            
            $
            83,200
            
            $
            163,693Working
                capital
            
            $
            832,744
            
            $
            2,567,684
            
            $
            (34,338,147
            )
            $
            (14,011,245
            )
            $
            (15,626,271
            )Total
                assets
            
            $
            5,549,137
            
            $
            7,891,377
            
            $
            13,305,777
            
            $
            17,760,733
            
            $
            23,767,866Total
                debt
            
            $
            4,907,824
            
            $
            5,140,554
            
            $
            36,535,119
            
            $
            15,545,829
            
            $
            13,345,378Net
                stockholders’ equity (deficit)
            
            $
            2,103,666
            
            $
            4,082,983
            
            $
            (23,883,233
            )
            $
            (3,614,425
            )
            $
            4,712,176




Prior
      period amount regarding number of shares outstanding and the price per share
      have been restated to give effect to a 338 for 1 reverse split which became
      effective upon our exit from bankruptcy on January 31, 2006.




PART
      II


**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”.*




**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 in 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, which manufactured and sold computer
      modems, sound cards and other multimedia components. In 1997, we acquired MYS
      Corporation of Japan (“MYS”), a manufacturer of speaker systems. NewCom ceased
      operations in 1999. 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.




20




We
      have
      not yet achieved a level of 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 and 2006. Since emerging
      from Chapter 11 proceeding, we have begun to increase our research and
      development activities and started to increase our staff in engineering and
      sales.




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 shares of Series B Preferred Stock and common stock
      warrants, conversion of $3.5 million of secured debt into shares of Series
      B
      Preferred Stock and warrants, 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
      consolidated 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.




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.




**Critical
      Accounting Policies and Estimates**




Our
      management’s 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.




21




*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 small 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 realizability 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.




Long-Term
      Investments: 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. Management reviews financial and other available information
      pertaining to such investments to determine if and when a decline, other than
      temporary, in the value of any investment has occurred and an adjustment is
      warranted.




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




When
      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**




Our
      fiscal 2007 net loss was $6.2 million. In fiscal 2006, we reported net income
      of
      $6.9 million. This was primarily 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. Net operating revenues and gross profit were $1.6 million and
      $.5
      million, respectively, in fiscal 2007, $1.8 million and $.7 million,
      respectively, in fiscal 2006, and $2.5 million and $(1.1) million, respectively,
      in fiscal 2005.




22




*Revenues*




Net
      revenues in fiscal 2007 decreased $132,031 to $1,624,074 from $1,756,105 in
      fiscal 2006, a decrease of approximately 7.5%. This slight decrease was due
      to
      the continued effects of the disruption to our business resulting from the
      bankruptcy proceeding and the prior reduction in the sales staff.





Net
      revenues in fiscal 2006 decreased $769,326 to $1,756,105 from $2,525,431 in
      fiscal 2005, a decrease of approximately 30%. This was due primarily to the
      lack
      of financial resources, the reduction in the workforce and the filing of
      bankruptcy.




*Cost
      of Goods*




Cost
      of
      goods sold in fiscal 2007 increased $130,733 to $745,060 from $614,327 in fiscal
      2006. As a percentage of net revenues, cost of goods sold was 45.9% in fiscal
      2007 compared to 35.2% in fiscal 2006. This was a result of the mix of products
      sold.





Cost
      of
      goods decreased to $614,327 in fiscal 2006 from $1,573,116 in fiscal 2005.
      As a
      percentage of costs of net revenues, cost of goods sold was 35.2% in fiscal
      2006
      compared to 62.3% 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 products
      sold.




*Engineering,
      Research and Development*




Engineering,
      research and development decreased $434,718 to $1,048,529 in fiscal 2007 from
      $1,483,247 in fiscal 2006. The decrease is attributable to our focusing more
      of
      our efforts in the area of production. As a percentage of net revenues,
      engineering, research and development was 64.6% in fiscal 2007 compared to
      84.5%
      in fiscal 2006. Research and development activities were negligible in fiscal
      2007 and 2006, as we significantly reduced our research activities due to our
      financial condition. We expect research and development activities to begin
      to
      increase as our financial condition improves and our sales
      increase.




Engineering,
      research and development expense decreased $999,421to $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.




*Selling,
      General and Administrative Expense*




Selling,
      general and administrative expenses (“SG&A”) decreased $666,995 to
      $5,200,393 in fiscal 2007 from $5,867,388 in fiscal 2006. The decrease was
      due
      to a reduction in legal expense of approximately $800,000, partially offset
      by
      an increase in our workforce as we began to rebuild after exiting
      bankruptcy.





In
      fiscal
      2006, SG&A decreased $1,019,154 to $5,867,388 from $6,886,542 in fiscal 2005.
      This decrease was primarily attributable to cost cutting efforts, including
      personnel reduction.




*Legal
      Settlements*




Legal
      settlements of $2,765,192 were recorded in fiscal 2005, primarily as a result
      of
      the settlement of 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 Preferred issued as part of the settlement.




*Asset
      Impairment*




During
      fiscal 2005 we recorded an asset impairment charge of $544,510 for the book
      value of our patents due to continued low sales. There were no comparable
      charges in either fiscal 2007 or fiscal 2006.




*Non-Operating
      Income and Expenses*




We
      incurred $0.3 million of asset impairment charges in fiscal 2005. There were
      no
      comparable charges in either fiscal 2007 or fiscal 2006.




23




Net
      interest expense decreased to approximately $400,000 in fiscal 2007 from $6.6
      million in fiscal 2006. The decrease is a result of our substantially lower
      debt
      levels when we exited bankruptcy. Net interest expense in fiscal 2006 decreased
      $12,363,832 to $6,602,020 from $18,965,852 in fiscal 2005. 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.




We
      realized gains of approximately $1.7 million on extinguishment of debt in fiscal
      2006 as a result of the settlement of certain debts related to our bankruptcy
      filing. There was no comparable item in fiscal 2007, and a negligible amount
      in
      fiscal 2005.




**Liquidity
      and Capital Resources**




At
      February 28, 2007, we had cash of approximately $1.05 million, compared to
      approximately $0.5 million at February 28, 2006. At February 28, 2007 we had
      working capital of approximately $800,000 as compared to approximately $2.6
      million at the end of the prior fiscal year. The decrease in working capital
      in
      2007 reflects the absence of “other receivables” at February 28, 2007, compared
      to $2.7 million in fiscal 2006, and an increase in current portion of notes
      payable from approximately $49,000 to $611,000, offset in part by a decrease
      in
      accounts payable from approximately $590,000 at February 28, 2006, to $216,000
      at February 28, 2007 and increased cash at February 28, 2007.




Working
      capital of approximately $2.6 million at February 28, 2006, compared to a
      deficit of approximately $34 million at February 28, 2005, reflects an “other
      receivable” in 2006 of $2,654,864 resulting from the sale of our buildings,
      subscriptions receivable 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, 2007, we had accounts receivable, net of allowance for doubtful
      accounts, of approximately $250,000 compared to approximately $88,000 at
      February 28, 2006, and $637,000 at February 28, 2005.




We
      acquired property and equipment at a cost of approximately $63,000 in fiscal
      2007, with no spending on property and equipment in the prior fiscal year.
      At
      February 28, 2007, we had no material capital project that would require
      funding. We believe our current plant and equipment is sufficient to support
      our
      current level of sales. If sales increase as anticipated, we will need to expand
      our facilities to meet the required production levels.




Debt
      repayments of $0.1 million were made in fiscal 2007 as compared to $4.7 million
      in fiscal 2006. The large debt repayment in fiscal 2006 was due to the payoff
      of
      the mortgage on the buildings that were sold.




During
      the year ended February 28, 2007 $167,346 of accrued and unpaid interest was
      added to the principal amount of notes payable. Under the terms of the notes,
      no
      payments were required for the first twelve months, and all interest accrued
      during this period is added to the balance of the notes.




Since
      2002 substantially all of our revenues from operations have been derived from
      sales of the AuraGen ® .
      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 in January 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.




24




*Principal
      Capital Transactions during Fiscal 2007*




During
      fiscal 2007 we issued 4,412,928 shares of common stock in private placements
      for
      net proceeds of $3,965,156.




*Principal
      Capital Transactions during Fiscal 2006 - 2006 Chapter 11 Reorganization
      Proceeding*




We
      filed
      for protection under Chapter 11 of the U.S. Bankruptcy Code in June 2005 as
      a
      result of acute liquidity challenges. 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
      approximately $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. Through agreements reached by the Company with a group of
      lenders holding secured notes (“Secured Notes”) with an aggregate principal
      balance in excess of $6 million, and the approval of the bankruptcy court,
      between July and December of 2005, we concluded a series of three new secured
      financings, totaling $3.36 million, with three new lenders (the “DIP
      Lenders”).




We
      submitted a reorganization plan that was approved by the bankruptcy court and
      voted and approved by the DIP Lenders, the secured creditors, the unsecured
      creditors, the shareholders and the new money investors. The principal terms
      of
      the Plan, which became effective on January 31, 2006 (the “Effective Date”), are
      as follows:




*Secured
      Note Holders* - The
      holders of the Secured Notes, 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
      substantially all of the assets of the Company, with annual interest of 7%,
      and
      payable in 48 equal monthly installments commencing 12 months after the
      Effective Date.





*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.




25




*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 the Company’s Board of
      Directors.




**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, 2007:




**Payments
                Due by
                Period****Contractual
                Obligations**
            
            
            
            **Total**
            
            **Less
                Than 1 Year**
            
            **1-3 Years**
            
            **3-5 Years**
            
            **More
                Than 5 Years**Long
                Term Debt Obligations
            
            
            (a
            )
            $
            2,594,529
            
            $
            611,411
            
            $
            1,358,614
            
            $
            624,504
            
            $
            0Capital
                lease obligations
            
            
            
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Operating
                leases
            
            
            (b
            )
            $
            175,500
            
            $
            175,500
            
            $
            0
            
            $
            0
            
            $
            0Minimum
                license commitment
            
            
            
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Fixed
                asset and inventory purchase commitments
            
            
            
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Total
                contractual cash obligations
            
            
            
            
            $
            2,770,029
            
            $
            786,911
            
            $
            1,358,614
            
            $
            624,504
            
            $
            0






(a)
            Represents
                notes payable dated January 31, 2006, bearing interest at a rate
                of 7% per
                annum and secured by substantially all of our assets. 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.




26




**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, 2007, that they
      were not effective in view of our delinquent filings.





As
      of
      February 28, 2007, 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. 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. We continued to be hampered by other 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. This
      problem was compounded by a change in accounting personnel in February 2006.





In
      February 2006, when we successfully emerged from bankruptcy under a plan of
      reorganization, we retained a new Chief Financial Officer and other accounting
      personnel. In May 2006we engaged new auditors to audit our financial statements
      for fiscal years from and after February 2005 and to review our interim
      quarterly financial statements for all subsequent quarters. We continue to
      work
      diligently towards the completion and filing of delinquent quarterly and annual
      reports. However, delays are unavoidable due to the impact of the factors
      discussed above and the number of financial reporting periods involved. We
      expect that once we become current in our SEC filings our disclosure controls
      and procedures will be adequate to ensure timely disclosure under SEC rules
      and
      regulations.




**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, 2007, that have materially affected or are
      reasonably likely to materially affect our internal control over financial
      reporting.





**ITEM
      9B. OTHER INFORMATION**





Not
      applicable.





27




**PART
      III**




**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND COOPERATE GOVERNANCE**




*Directors*




The
      following table sets forth our directors and executive officers, 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 certain information with respect to our directors and
      executive officers.




**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.




**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.




28




**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. Based solely upon a review of
      Forms 3 and 4 and amendments thereto furnished to us during our fiscal year
      ended February 28, 2007, and Form 5 and amendments thereto furnished to us
      covering the 2007 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. The current members of the Audit
      Committee are Warren Breslow, (Chairman), Dr. Maurice Zeitlin and Salvador
      Diaz-Verson. Our Board has determined that all members of the Audit Committee
      are “independent” 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. The Audit
      Committee has adopted a written Audit Committee charter. A copy of our current
      Audit Committee Charter is included as an exhibit to this Annual Report on
      Form
      10-K.





29




**ITEM
      11. EXECUTIVE COMPENSATION**




**COMPENSATION
      DISCUSSION AND ANALYSIS**





*Executive
      Compensation Policy and Objectives*





Our
      policy in compensating executive officers, including the executive officers
      named in the Summary Compensation Table appearing below (the “named executive
      officers”), is to establish methods and levels of compensation that will





·
            attract
                and retain highly qualified
                personnel


·
            provide
                meaningful incentives to promote profitability and growth and reward
                superior performance.





To
      achieve these policies we follow the basic principles that annual compensation
      should be competitive with similar companies and long term compensation should
      generally be linked to the Company’s return to shareholders.




We
      also
      believe that compensation for individual executives should be aligned to the
      performance of areas of the business over which the executive has the most
      control.





Executive
      compensation policies are implemented through a combination of annual and
      long-term methods of compensation. Compensation for the named executive officers
      includes





·
            base
                salary,


·
            eligibility
                to receive annual cash bonuses, and


·
            stock-based
                compensation in the form of stock options under employee stock option
                plans.




These
      primary components are available for flexible use by our company in a manner
      that will effectively implement our stated objectives with respect to
      compensation arrangements for each of the executive officers. Each of these
      components is discussed in more detail below. When setting the compensation
      arrangements for each executive officer, the Compensation Committee considers
      these components individually, as well as on an aggregate (total compensation)
      basis. There is no pre-determined relationship between base salary of our
      executives and any of the other principal components of compensation. Each
      element of compensation is considered both individually and in terms of total
      overall compensation.




*Role
      of Company Management in Compensation Decisions*




The
      Compensation Committee makes decisions regarding the compensation of the Chief
      Executive Officer usually in conjunction with input from the Chief Executive
      Officer, including base compensation, equity incentive awards, annual incentive
      award payments. The Chief Executive Officer annually reviews compensation for
      the other named executive officer and makes recommendations to the Compensation
      Committee based upon individual and company performance. The Compensation
      Committee reviews and approves, and may exercise discretion to modify, all
      recommendations made by the Chief Executive Officer.




*Primary
      Components of Executive Compensation.*




**Base
      Salary**





The
      base
      salaries of our executive officers are set by the Compensation Committee after
      consideration of a number of factors, including the executive’s position, level
      of responsibility, tenure and performance. The Compensation Committee also
      considers the compensation levels of executives in comparable companies, along
      with the executive compensation recommendations made by our chief executive
      officer. In addition, the Compensation Committee evaluates whether the base
      salary levels of our executives are appropriate relative to our size and
      financial performance compared with the other companies reviewed. Relying
      primarily on these factors, the Compensation Committee sets the base salaries
      of
      our executive officers at levels designed to meet its objective of attracting
      and retaining highly qualified individuals. The Compensation Committee also
      believes that the continuity of leadership derived from the retention of well
      qualified executive officers is in the best interests of our shareholders.
      The
      base salaries of our executive officers are not set at any specific level as
      compared to the compensation levels of companies reviewed and the Compensation
      Committee does not assign relative weights or importance to any specific measure
      of the company’s financial performance.




30




Effective
      January 1, 2006, Mr. Gagerman’s base salary was set at $25,000 per month in
      connection with his appointment as Chairman of the Board and Chief Financial
      Officer. Mr. Gagerman’s base salary was later increased from $25,000 to $30,000
      per month, effective November 1, 2006, pursuant to a written employment
      agreement (the “Gagerman Agreement”). The decision to increase Mr. Gagerman’s
      base salary was based primarily upon the increase in his responsibilities since
      May 2006, when he formally assumed the role of President and Chief Executive
      Officer.




**Annual
      Cash Incentive Payment**




We
      consider the use of annual performance bonuses from time to time where
      appropriate, to motivate participants to achieve company growth and enhance
      shareholder value. The incentive bonus plan permits plan participants to receive
      a cash bonus that is tied to the company’s performance and achievement of
      measures relating to an individual’s own performance during a specified
      fiscal year. The types of measures and relative weight of those measures used
      in
      determining annual incentive awards are tailored to the named executive
      officer’s position and responsibilities. We maintain an annual cash bonus plan
      for Mr. Gagerman, which was established effective November 1, 2006, beginning
      in
      fiscal year 2007, under the terms of the Gagerman Agreement. We do not presently
      have in effect an annual cash bonus plan in effect with respect to any other
      named executive officer.




The
      Gagerman Agreement provides for an annual bonus to be approved by the Board
      of
      Directors of up to $100,000 based on objective and subjective milestones and,
      in
      the case of the 2007 fiscal year, provided the company has the available cash,
      and an additional annual bonus at the discretion of the Board of Directors
      of up
      to $100,000 for achievements in excess of expected milestones. The initial
      qualitative milestones and their quantitative relative weight were specified
      in
      the Gagerman Agreement for fiscal 2007, fiscal 2008 and fiscal 2009, and relate
      to achievement of specified business, financial and organizational performance
      goals. The Compensation Committee may change both the qualitative goals and
      relative weight of the goals by giving notice to Mr. Gagerman prior to the
      fiscal quarter that the change will take effect. In addition, the Compensation
      Committee retains the discretion under the Gagerman Agreement to pay an annual
      bonus regardless of whether the stated milestones are achieved. The milestones
      are set with the expectation that it is probable that the milestones will be
      met
      in the applicable fiscal year. In December 2007 the Compensation Committee
      determined to award Mr. Gagerman a bonus of $100,000 for the fiscal 2007
      year.




**Long-Term
      Equity Based Compensation Awards**




To
      date
      we have had limited cash flow from operations. As a result, we have placed
      special emphasis on equity-based compensation, in the form of options and
      warrants, to preserve our cash for operations. Long-term equity based
      compensation awards are granted to our executive officers pursuant to our equity
      plans. The Compensation Committee believes that long-term equity based
      compensation awards are an effective incentive for senior management to increase
      the long-term value of the company’s common stock as well as aiding the company
      in attracting and retaining senior management. These objectives are accomplished
      by making awards under the plan, thereby providing senior management with a
      proprietary interest in the continued growth and performance of the company
      and
      more closely aligning their interests with those of our shareholders. In
      addition, because options may sometimes terminate when an executive leaves
      the
      company, we believe that options are a useful incentive in promoting the
      retention of executives.




*2006
      Employee Stock Option Plan*




** In
      September 2006 our Board of Directors adopted an employee stock option plan,
      which is subject to shareholder approval at our next annual meeting of
      shareholders. The option plan authorizes the Board of Directors or a committee
      of directors designated by the Board (the “Option Committee”) to grant up to
      3,000,000 options to employees, directors and consultants. At the time of the
      option grant the Option Committee designates the option for federal tax purposes
      as an “incentive stock option” or “non-statutory stock option.” The named
      executive officers are eligible to receive option grants under the option
      plan.




All
      determinations regarding the granting of options to executive officers,
      including the amount, exercise price, and terms of vesting, are made by the
      Option Committee after seeking input from management. The Option Committee
      makes
      long-term equity based compensation awards after a review of a number of
      factors, including length of service, the performance of the company, the
      relative levels of responsibility of the executive and his or her contributions
      to the business, including recommendations of supervisors, and prior option
      grants received by the executive. Awards
      may be granted to the same executive on more than one occasion.




31




Stock
      option grants may be subject to a vesting period based upon continued employment
      during the option term or may fully vest upon grant. The Option Committee may
      make grants at any particular time during the year. The
      exercise price of the options must be at least equal to the fair market value
      of
      such shares on the date the stock option is granted or such later date as the
      Option Committee specifies.




In
      fiscal
      2007, pursuant to the Gagerman Agreement, and following his appointment as
      CEO
      in May 2006, Mr. Gagerman was awarded a total of 300,000 options to purchase
      common stock under our employee stock option plan, exercisable at $2.00 per
      share, for a period of three years, of which 50,000 were designated as incentive
      stock options, the maximum amount allowable as incentive stock options under
      federal tax law for this grant. This grant primarily reflected his increased
      responsibilities as CEO. These 300,000 options were granted in addition to
      600,000 warrants which were awarded to Mr. Gagerman in connection with his
      assuming the duties of Chairman and Chief Financial Officer effective February
      2006. The 300,000 options vest at the rate of 25,000 per month. The Gagerman
      Agreement provides for acceleration of the vesting, and termination of the
      options prior to the expiration of the three year term, under circumstances
      specified in the Gagerman Agreement.




Subsequent
      to the end of fiscal 2007, in order to provide additional incentives to Mr.
      Gagerman, and in recognition of his accomplishments as both CEO and acting
      CFO,
      Mr. Gagerman was granted an additional 100,000 options, exercisable at $2.00
      per
      share, with a term of five years. This grant is subject to shareholder approval.
      In addition, subsequent to the end of fiscal 2007, we determined to extend
      the
      term of his 600,000 warrants from three years to five years and to fix the
      exercise price at $2.00 per share during the term of the warrants, subject
      to
      shareholder approval.




Pursuant
      to our agreements with Mr. Gagerman, all of the options and warrants granted
      to
      him have a “cashless exercise feature” which allows Mr. Gagerman, at his option,
      to receive a reduced number of shares upon exercise of the options or warrants
      instead of paying the exercise price in cash.




**Other
      Benefits** *.*




We
      provide all eligible employees, including executive officers, with certain
      benefits, including health and dental coverage, company-paid term life insurance
      coverage, disability insurance, 401(k) plan, paid time off and paid holiday
      programs. Other perquisites and personal benefits, such as automobile allowances
      and country club dues, are considered on a case-by-case basis. Executive
      Perquisites and benefits are provided to ensure overall compensation for named
      executive officers is adequate.





Our
      executive officers are eligible to participate in our 401(k) plan, with Mr.
      Cohen being the only executive officer to participate. We do not presently
      maintain any other deferred compensation or retirement plans.





We
      provide the foregoing benefit programs to provide executive officers with
      benefits that are competitive with those in the marketplace without incurring
      substantial cost to the company.





*Employment
      Agreements.* Other
      than our written employment agreement with Melvin Gagerman, we do not have
      employment agreements with any of our named executive officers and generally
      do
      not enter into long-term employment agreements with our executive officers.
      Information regarding Mr. Gagerman’s written employment agreement is discussed
      below.





*Severance
      Agreements.* Other
      than severance provisions contained in our written employment agreement with
      Melvin Gagerman, we generally do not enter into severance agreements or similar
      agreements providing for payments upon termination of employment or
      change-in-control. Such agreements, when entered into, are negotiated on a
      case-by-case basis.





*Material
      Tax and Accounting Implications of Executive Compensation
      Program.*





SFAS
      123R
      sets forth the accounting treatment for options effective March 1, 2006. This
      accounting rule requires all share-based payments to employees, including grants
      of employee stock options, to be recognized in the income statement based on
      their fair values. Prior to March 1, 2006 we followed Accounting Principles
      Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees,
      and related Interpretations for measurement and recognition of stock-based
      transactions with employees. Under APB 25, generally no compensation expense
      was
      recognized in connection with the grant of a stock option since at the date
      of
      grant, the exercise price of stock options was set either at, or above, current
      price at closing of market or, at the price at closing of market on a
      pre-determined future date. Because the adoption of SFAS 123R’s fair value
      method will have an impact on our results of operations, this may have an impact
      on the level of share-based payments being issued.




32




U.S.
      federal income tax law prohibits publicly held companies from deducting certain
      compensation paid to a named executive officer that exceeds $1 million
      during the tax year. To the extent that compensation is based upon the
      attainment of performance goals set by the Compensation Committee pursuant
      to
      plans approved by our shareholders, the compensation is not included in the
      computation of this limit. Although the Compensation Committee intends, to
      the
      extent feasible and where it believes it is in the best interests of the company
      and our shareholders, to attempt to qualify executive compensation as tax
      deductible, it does not intend to permit this tax provision to dictate the
      committee’s development and execution of effective compensation
      plans.





*Tax
      Consequences of Incentive Stock Options.* Our 2006
      employee stock option plan authorizes the grant of both “incentive stock
      options” and “non-qualified stock options.” The grant of an incentive stock
      option will not result in any immediate tax consequences to us or the optionee.
      An optionee will not realize taxable income, and we will not be entitled to
      any
      deduction, upon the timely exercise of an incentive stock option, but the excess
      of the fair market value of the shares of our common stock acquired over the
      option exercise price will be includable in the optionee’s “alternative minimum
      taxable income” for purposes of the alternative minimum tax. If the optionee
      does not dispose of the shares of our common stock acquired within one year
      after their receipt, and within two years after the option was granted, gain
      or
      loss realized on the subsequent disposition of the shares of our common stock
      will be treated as long-term capital gain or loss.





*Tax
      Consequences of Non-qualified Stock Options.* In
      general, the grant of a non-qualified stock option or warrant will not result
      in
      any immediate tax consequences to us or the optionee. Upon the exercise of
      a
      non-qualified stock option or warrant, generally the optionee will realize
      ordinary income and we will be entitled to a deduction, in each case, in an
      amount equal to the excess of the fair market value of the shares of our common
      stock acquired at the time of exercise over the exercise price.




**COMPENSATION
      COMMITTEE REPORT**




The
      Compensation Committee has reviewed and discussed with management the
“Compensation Discussion and Analysis” section included in this annual report.
      Based on this review and discussion, the Compensation Committee recommended
      to
      the board of directors that the “Compensation Discussion and Analysis” section
      be included in this annual report.





**The
      Compensation Committee:**





**Warren
      Breslow**


**Dr.
      Maurice Zeitlin**


**Salvatore
      Diaz-Verson**




33





The
      following table summarizes all compensation earned for the fiscal year ended
      February 28, 2007, to the individual who served as our chief executive officer
      during fiscal 2007, and the one other most highly compensated executive officer
      who was serving in such capacity as of February 28, 2007 (the "named executive
      officers").





**2007
      Summary Compensation Table**




**Name
                and Principal Position**
            
            **Fiscal
                Year**
            
            **Salary
                ($)**
            
            **Option**
              **Awards**
              **($)
                [3]**
            
            **Non-Equity
                Incentive Plan Compensation**
            
            **All
                Other**
              **Compensation
                ($)**
            
            **Total**
              **($)**Melvin
                Gagerman (1)
            
            
            2007
            
            
            319,154
            (2)
            
            171,359
            
            
            100,000(4
            )
            
            19,320
            (5)
            
            609,833Chief
                Executive Officer,
              Chief
                Financial Officer, and PresidentYedidia
                Cohen
            
            
            2007
            
            
            164,285
            
            
            
            
            
            
            
            
            808
            (6)
            
            165,093Vice
                President of Engineering




(1)
            Mr.
                Gagerman was elected Chairman and Chief Financial Officer effective
                February 1, 2006 and was elected President and Chief Executive Officer
                effective May 25, 2006.


(2)
            Mr.
                Gagerman’s salary was $25,000 per month from January 1, 2006 until
                December 1, 2006 at which time it was increased to $30,000 per
                month.


(3)
            Reflects
                the amount recognized for financial statement reporting purposes
                for
                fiscal 2007 in accordance with FAS 123R using the assumptions set
                forth in
                footnote 11 to the financial statements included elsewhere in this
                Annual
                Report for stock options and warrants granted during and prior to
                fiscal
                2007, assuming no forfeitures.


(4)
            Represents
                incentive plan cash bonus awarded to Mr. Gagerman for fiscal 2007,
                which
                has been earned but not yet paid.


(5)
            Represents
                automobile and country club dues allowances, the cost of life insurance
                premiums, and medical expense reimbursements for fiscal
                2007.


(6)
            Represents
                Company matching contributions to the 401(k)
                plan.





No
      bonuses or stock awards were granted to the above individuals for the fiscal
      year ended February 28, 2007.





**Grants
      of Plan-Based Awards in the Last Fiscal Year**




The
      following table sets forth certain information at February 28, 2007, and for
      the
      year then ended, with respect to plan-based awards granted to the individuals
      named in the Summary Compensation Table above.





**2007
      GRANTS OF PLAN-BASED AWARDS TABLE**




**Estimated
                Future Payouts Under**
              **Non-Equity Incentive Plan Awards(3)(4)**
            
            **Option Awards:**
              **Number
                of**
              **Securities**
              **Underlying**
              **Options**
              **(#)**
            
            **Exercise or**
              **Base
                Price**
              **of
                Option**
              **Awards**
              **($ / Sh)**
            
            **Grant
                Date**
              **Fair**
              **Value
                of Option**
              **Awards
                ($)(1)****Name**
            
            **Grant**
              **Date
                (5)**
            
            **Approval**
              **Date
                (5)**
            
            **Threshold**
              **($)**
            
            **Target**
              **($)**
            
            **Maximum**
              **($)**(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)Melvin
                Gagerman
            
            11/01/06
            
            12/01/06
            
            
            
            
            
            
            
            300,000(2)
            
            $2.00(2)
            
            $56,359n/a
            
            n/a
            
            (3)
            
            $100,000
            
            $200,000
            
            -
            
            -
            
            -Yedidia
                Cohen
            
            
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -





(1)
            Reflects
                the full grant date fair market value, computed in accordance with
                FAS
                123R using the assumptions set forth in footnote 11 to the financial
                statements included elsewhere in this Annual Report for stock options
                and
                warrants granted in fiscal 2007, assuming no forfeitures.****


(2)
            Options
                vest at the rate of 25,000 per month from the date of grant and are
                exercisable at a price of $2.00 per share, with an initial term of
                three
                years. Subsequent to the end of fiscal 2007 the term of these options
                were
                extended from three years to five years. Under the terms of our Bylaws,
                this grant is subject to shareholder
                approval.


(3)
            The
                written employment agreement with Mr. Gagerman (the Gagerman Agreement)
                provides for an annual bonus in each fiscal year to be approved by
                the
                Board of Directors of up to $100,000 based on objective and subjective
                milestones and, in the case of the 2007 fiscal year, provided the
                company
                has the available cash, and an additional annual bonus at the discretion
                of the Board of Directors of up to $100,000 for achievements in excess
                of
                expected milestones. The initial qualitative milestones and their
                quantitative relative weight were specified in the Gagerman Agreement
                for
                fiscal 2007, fiscal 2008 and fiscal 2009, and relate to achievement
                of
                specified business, financial and organizational performance goals.
                The
                Compensation Committee may change both the qualitative goals and
                relative
                weight of the goals by giving notice to Mr. Gagerman prior to the
                fiscal
                quarter that the change will take effect. In addition, the Compensation
                Committee retains the discretion under the Gagerman Agreement to
                pay an
                annual bonus regardless of whether the stated milestones are achieved.
                In
                December 2007 the Compensation Committee determined to award Mr.
                Gagerman
                a bonus of $100,000 for the fiscal 2007 year, which amount is reflected
                in
                the Summary Compensation Table. He remains eligible for bonuses in
                future
                fiscal years.


(4)
            Column
                (e) represents the amount payable if all of the annual targets are
                met,
                and column (f) represents the maximum amount payable under the plan
                established in the Gagerman
                Agreement.


(5)
            The
                grant date reflects the effective date of the equity grant for financial
                statement purposes under FAS 123R, which corresponds to the stated
                effective date of the Gagerman Agreement containing the grant. The
                approval date reflects the date the Compensation Committee formally
                approved the Gagerman Agreement.





34





**Outstanding
      Equity Awards at 2007 Fiscal Year-End**





The
      following table summarizes certain information regarding the number and value
      of
      all options to purchase our common held by the individuals named in the Summary
      Compensation Table at February 28, 2007. No stock awards or equity incentive
      plan awards were issued or outstanding during fiscal 2007.





**2007
      OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END**


**Option
                  Awards****Number
                  of****Securities****Underlying****Unexercised****Options**
                **(#)**
              
              **Number
                  of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **(#)**
              
              **Equity**
                **Incentive**
                **Plan Awards:**
                **Number
                  of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Unearned**
                **Options**
              
              **Option**
                **Exercise**
                **Price**
              
              **Option**
                **Expiration****Name**
              
              **Exercisable**
              
              **Unexercisable**
              
              **(#)**
              
              **($)**
              
              **Date**Melvin
                  Gagerman (a)(b)
              
              250,000(b)
              
              0(b)
              
              --
              
              $2.50(a)
              
              1/31/09Melvin
                  Gagerman (c)(d)
              
              350,000(d)
              
              0(d)
              
              
              
              $2.50(c)
              
              1/31/09Melvin
                  Gagerman (e)
              
              75,000(e)
              
              225,000(e)
              
              
              
              $2.00
              
              11/1/09Yedidia
                  Cohen
              
              --
              
              --
              
              --





(a)
            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 twelve (12) months
                from
                the effective date of issuance(January
                31, 2006),
                $2.50 per share from the 13thto
                the 24thmonths from the effective date of issuance; and $3.00 per share from
                the
                25thto
                the 36thmonth 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
                exercise
                price in the table does not reflect shareholder approval. Subsequent
                to
                the end of fiscal 2007 the term of these options was extended from
                three
                years to five years, subject to shareholder
                approval.




(b)
            The
                Management Warrants vest over a 36 month period: 1/36thof
                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. The vesting information in the table assumes
                shareholder approval.




(c)
            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 exercise
                price in
                the table does not reflect shareholder approval. Subsequent to the
                end of
                fiscal 2007 the term of these options was extended from three years
                to
                five years, subject to shareholder
                approval.




35




(d)
            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. The vesting information in the table assumes
                shareholder approval.




(e)
            These
                options were granted pursuant to the Gagerman Agreement entered into
                effective November 1, 2006. Options vest at the rate of 25,000 per
                month
                from the date of grant (November 1, 2006) and are exercisable at
                a price
                of $2.00 per share, with a term of three years. Subsequent to the
                end of
                fiscal 2007 the term of these options was extended from three years
                to
                five years. Under the terms of our Bylaws, this grant is subject
                to
                shareholder approval.





**Option
      Exercises and Stock Vesting During 2007**





No
      stock
      options were exercised during fiscal 2007 by the individuals named in the
      Summary Compensation Table. No stock awards were issued or outstanding during
      fiscal 2007.




**Employment
      Contracts, Termination of Employment Contracts and Change in Control
      Arrangements**




**Gagerman
      Employment Agreement**





Effective
      November 1, 2006, we entered into a written employment agreement with Melvin
      Gagerman (the “Gagerman Agreement”) regarding the terms and conditions of his
      employment as CEO. The Gagerman Agreement originally was in effect through
      February 28, 2010, and is automatically extended by an additional year at the
      beginning of each fiscal year unless we give prior notice of our intent not
      to
      extend the agreement. Accordingly, the Gagerman Agreement is currently in effect
      until February 28, 2011. The agreement may be terminated before its stated
      expiration by either of the parties under specified terms and conditions
      Following are the material terms of the Gagerman Agreement.





*Base
      Salary and Annual Bonus.*





Mr.
      Gagerman is entitled to a base salary of $360,000 per year. The Gagerman
      Agreement also provides for an annual bonus to be approved by the Board of
      Directors of up to $100,000 based on objective and subjective milestones and,
      in
      the case of the 2007 fiscal year, provided the company has the available cash,
      and an additional annual bonus at the discretion of the Board of Directors
      of up
      to $100,000 for achievements in excess of expected milestones. The initial
      qualitative milestones and their quantitative relative weight were specified
      in
      the Gagerman Agreement for fiscal 2007, fiscal 2008 and fiscal 2009, and relate
      to achievement of specified business, financial and organizational performance
      goals. The company may change both the qualitative goals and relative weight
      of
      the goals by giving notice to Mr. Gagerman prior to the fiscal quarter that
      the
      change will take effect. In addition, we retain the discretion under the
      Gagerman Agreement to pay an annual bonus regardless of whether the stated
      milestones are achieved. Bonuses are payable within 45 days after the end of
      the
      applicable fiscal year.




*Stock
      Options*





The
      Gagerman Agreement provides for him to receive options to purchase 300,000
      shares of Common Stock at an exercise price of $2.00 per share, of which 50,000
      options are designated for tax purposes as “incentive stock options” and the
      remaining options are non-qualified options. The Gagerman Agreement originally
      provided for a term of three years, but was subsequently extended to five years.
      The options vest at the rate of 25,000 per month. Unvested options vest if
      the
      Gagerman Agreement is terminated by either party under specified circumstances.
      All of these options vested as of November 2007.





*Life
      Insurance, Dues and Car Allowance*





The
      Gagerman Agreement requires us to pay life insurance premiums on his private
      life insurance policy, up to $7,500 per year. Mr. Gagerman is also entitled
      to
      receive $2,000 per month as an automobile allowance and country club dues,
      and
      reimbursement of the country club initiation fee of up to $8,000.




36




*Medical
      Benefits*




In
      addition to health and dental insurance generally available to all of our
      employees, Me. Gagerman is also entitled to receive reimbursement of up to
      $15,000 per year for all non-covered medical and dental expenses for himself
      and
      his spouse, including deductibles and co-payments. His agreement also entitles
      him to reimbursement for the cost of long term care insurance.





*Early
      Termination of Agreement*





The
      Gagerman Agreement provides that either party may terminate the agreement prior
      to its stated term of February 28, 2010, upon occurrence of the following
      events:





·
            Death
                or Permanent Disability-
                The agreement automatically terminates upon Mr. Gagerman’s death or
                disability (as determined under our Long-Term Disability Plan, which
                provides for a benefit of 50% of his monthly salary to a maximum
                of $6,000
                per month).





·
            By
                the Company For Cause-
                We may terminate the agreement for “cause”. The agreement defines “cause”
                to include:





·
            a
                breach by Mr. Gagerman of his obligations not to compete with us
                during
                the term of his employment;


·
            a
                breach by Mr. Gagerman of his obligation to maintain confidential
                information


·
            commission
                of an act of fraud, embezzlement or dishonesty which is injurious
                to
                us;


·
            intentional
                misconduct which is detrimental to our business or
                reputation





·
            By
                the Company for Non-Performance-
                We may terminate the agreement upon 120 days prior notice in the
                event of
                “non-performance” by Mr. Gagerman. The agreement defines “non-performance”
                to mean a determination by not less than 75% of the members of our
                Board
                of Directors that Mr. Gagerman is not performing his duties as CEO
                and the
                continuation of the non-performance for 15 days after receiving notice
                of
                the Board’s determination.





·
            By
                The Company Without Cause or Non-Performance-
                We may terminate the agreement upon not less than 12 months notice,
                without regard to Mr. Gagerman’s
                performance.





·
            By
                Mr. Gagerman For Cause-
                Mr. Gagerman may terminate the agreement for “cause” upon not less than 45
                days notice. The agreement defines “cause” to
                include:





·
            A
                change in his job responsibilities resulting from a demotion;
                and


·
            His
                removal as a member of the Board of
                Directors.





·
            By
                Mr. Gagerman Without Cause-
                Mr. Gagerman may terminate the agreement upon not less than 120 days
                notice without regard to whether we are meeting our obligation under
                the
                agreement.





·
            By
                Mr. Gagerman Upon a Change of Control-
                Mr. Gagerman may terminate the agreement upon not less than 30 days
                notice
                at any time following a “change in control.” The agreement defines change
                of control to mean:





·
            The
                acquisition by a new investor of more than 50% of our common stock,
                or




·
            The
                change of a majority of our board members either by an individual
                or by
                one or more groups acting together.




*Severance
      Benefits Upon Termination*





Base
      Salary and Bonus .
      Upon
      the termination of Mr. Gagerman’s employment as CEO, he is entitled to receive
      accrued salary, unpaid bonus payments (if any) through the effective date of
      his
      termination.





Employee
      Benefits .
      All
      employee benefits, including life insurance premiums and automobile and dues
      allowances, cease to accrue as of the date of termination.




37




Stock
      Options - Upon
      the termination of Mr. Gagerman’s employment as CEO the portion of the 300,000
      options which are vested as of the date of termination remain exercisable in
      accordance with their terms. The unvested portion of the 300,000 options
      terminate upon termination of the agreement unless:





·
            termination
                is a result of a “change in control”;
                or


·
            We
                terminate the agreement other than for “cause” or
                “non-performance.”





in
      which
      case the unvested options become fully exercisable upon termination.





Lump
      Sum Severance Payment - Under
      the terms of the agreement Mr. Gagerman is entitle to a lump sum severance
      payment within 45 days of termination equal to the greater of one year’s base
      salary ($360,000), or the unpaid balance of the base salary which would have
      been payable if Mr. Gagerman remained employed through the stated term of
      employment in effect immediately prior to the termination if:





·
            termination
                is a result of a “change in
                control”;


·
            Mr.
                Gagerman terminates the agreement for “cause”;
                or


·
            We
                terminate the agreement other than for “cause” or
                “non-performance.”





Each
      of
      these events is referred to as a “severance payment event.”





**Potential
      Payments to the Named Executive Officers Upon Termination or Change in
      Control**





Other
      than the benefits provided for in Mr. Gagerman’s written employment agreement,
      which are described above, none of the named executive officers are entitled
      to
      any payments or benefits upon termination, whether by change in control or
      otherwise, other than benefits available generally to all employees.





Upon
      the
      occurrence of a severance payment event for Mr. Gagerman, assuming he were
      terminated as of February 28, 2007, he would be entitled to a severance payment
      of $1,080,000, payable within 45 days of the date of his
      termination.





Mr.
      Gagerman was the only named executive officer with unvested options or warrants
      outstanding as of February 28, 2007. The vesting of unvested options is
      accelerated upon termination of Mr. Gagerman’s employment under the
      circumstances described above. However, none of Mr. Gagerman’s were exercisable
      at a price less than the closing price of our Common Stock as of February 28,
      2007.




**Director
      Compensation During Fiscal 2007**





The
      following table summarizes all compensation paid to directors other than named
      executive officers during fiscal 2007.





**2007
      DIRECTOR COMPENSATION TABLE**





**Name**
            
            **Fees**
              **Earned**
              **or
                Paid**
              **in Cash**
              **($)**
            
            **Stock**
              **Awards**
              **($)**
            
            **Option**
              **Awards**
              **($)
                (1)(2)**
            
            **Non-Equity**
              **Incentive
                Plan**
              **Compensation**
              **($)**
            
            **All
                Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**Arthur
                J. Schwartz (4)
            
            -
            
            -
            
            6,617
            
            -
            
            142,231(10)
            
            148,848Maurice
                Zeitlin (5)
            
            -
            
            -
            
            6,617
            
            -
            
            -
            
            6,617Warren
                Breslow (6)
            
            -
            
            -
            
            6,617
            
            -
            
            -
            
            6,617Sheldon
                Appel (3)(7)
            
            -
            
            -
            
            6,617
            
            -
            
            -
            
            6,617Salvador
                Diaz-Verson, Jr. (8)(9)
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -






(1)
            Reflects
                the amount recognized for financial statement reporting purposes
                for
                fiscal year 2007 in accordance with FAS 123(R) using the assumptions
                set
                forth in the footnote 11 to the financial statements included elsewhere
                in
                this Annual Report for stock option awards granted during and prior
                to
                2007, assuming no forfeitures.


(2)
            In
                fiscal 2007 Messrs. Zeitlin and Breslow were each granted Director
                Warrants (options) to acquire 25,000 shares, of our common stock
                at an
                exercise price of $2.50 per share, respectively, being the fair market
                value of our common stock on the date of grant, which options vest
                at a
                rate of 25% every six months and expire in May, 2009. The fair market
                value of each of these options at the time of grant, computed in
                accordance with FAS 123(R), was $13,233.






38




(3)
            Mr.
                Appel resigned as a director in June,
                2007.


(4)
            The
                director had 25,000 options outstanding as of February 28,
                2007.


(5)
            The
                director had 25,000 options outstanding as of February 28,
                2007.


(6)
            The
                director had 25,000 options outstanding as of February 28, 2007.


(7)
            The
                director had 12,500 options outstanding as of February 28, 2007.


(8)
            The
                director had 0 options outstanding as of February 28,
                2007.


(9)
            Mr.
                Diaz-Verson, Jr. was appointed as a director on January 19,
                2007.


(10)
            Dr.
                Schwartz was a consultant to the company from March 1, 2006, until
                November 30, 2006, at which time he became an employee of the
                company.




Our
      Board
      of Directors may, at its discretion, compensate directors for attending board
      and committee meetings and reimburse the directors for out-of-pocket expenses
      incurred in connection with attending such meetings. Our directors are also
      eligible to receive stock option grants under our 2006 employee stock option
      plan and Director Warrants authorized under our Chapter 11 Plan of
      Reorganization.




***Compensation
      Committee Interlocks and Insider Participation***




During
      the 2007 fiscal year our Compensation Committee was comprised of Messrs.
      Breslow, Appel and Zeitlin. None of the members of the Compensation Committee
      was an executive officer or employee of the Company. During the 2007 fiscal
      year, none of our executive officers served on our Compensation
      Committee.




**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 known to be 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 in the Summary Compensation Table, and (iii) by all Directors and
      current executive officers as a group:




**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
            %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
            
            
            *Yedidia
                Cohen (12)
            
            
            57,962
            
            
            *All
                current executive officers and Directors as a group (six)
            
            
            4,118,694
            
            
            11.2
            %




*
      Less
      than 1% of outstanding shares.




39




(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
                279,313 warrants and options exercisable within 60 days of December
                31,
                2007.


(11)
            Includes
                60,989 warrants and options exercisable within 60 days of December
                31,
                2007.


(12)
            Includes
                51,327 warrants and options exercisable within 60 days of December
                31,
                2007.






The
      mailing address for the officers and directors is c/o Aura Systems, Inc., 2330
      Utah Avenue, El Segundo, CA 90245.




40





**Securities
      Authorized for Issuance Under Equity Compensation Plans**  **as
      of February 28, 2007**





**Equity
      Compensation Plan Information as of February 28, 2007**


**Number
                  of Securities to be Issued Upon Exercise of Outstanding Options,
                  Warrants
                  and Rights**
              
              **Weighted-average
                  Exercise Price of Outstanding Options, Warrants and
                  Rights**
              
              **Number
                  of Securities Remaining Available for Future Issuance Under Equity
                  Compensation Plans (Excluding Securities Reflected in Column
                  (a))****Plan
                  Category**
              
              **(a)**
              
              **(b)**
              
              **(c)**Equity
                  compensation plans approved by security holders
              
              802,778
              
              $2.15
              
              197,222Equity
                  compensation plans not approved by security holders
              
              
              
              
              
              3,000,000Total
              
              802,778
              
              $2.15
              
              3,197,222




We
      maintain three equity compensation plans as of February 28, 2007, two of which
      have been approved by our security holders, and one which has not yet been
      submitted to security holders. Under our Chapter 11 Bankruptcy Plan of
      Reorganization, which was approved by our creditors and shareholders and became
      effective 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.




*2006
      Employee Stock Option Plan -* In
      September 2006 our Board of Directors adopted the 2006 Employee Stock Option
      Plan (the “Option Plan”). The Option Plan authorizes the Board of Directors or a
      committee of directors designated by the Board to grant up to 3,000,000 options
      to employees, directors and consultants. The Option Plan and the options granted
      under the Option Plan are subject to shareholder approval at the next Annual
      Meeting of Shareholders. For further information regarding the terms of the
      Option Plan see “Item 11 - Compensation Discussion and Analysis - Long-Term
      Equity Based Compensation Awards.”




**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**




*Related
      Transactions*




Since
      the
      beginning of the 2007 fiscal year, Mr. Breslow, a director, has made various
      temporary advances to the Company totaling $900,000. The highest amount
      outstanding at any one time was $500,000, and as of January 31, 2008, there
      is
      an outstanding balance of $500,000. Mr. Breslow also participated in a private
      placement with the Company in the amount of $850,000. Interest on the advances
      was at a rate of 10% per annum and totaled $1,452.05 through January 31, 2008.




Mr.
      Schwartz, a director, has made various temporary advances to the Company
      totaling $175,000. The highest amount outstanding at any one time was $100,000,
      and as of January 31, 2008, there was no outstanding balance. Mr. Schwartz
      also
      participated in a private placement with the Company in the amount of $13,000.
      Interest on the advances was at a rate of 10% per annum and totaled $794.52
      through January 31, 2008.




41




*Review
      and Approval of Related Party Transactions*




Our
      Audit
      Committee is responsible for the review and approval of all related party
      transactions required to be disclosed to the public under SEC rules. This
      procedure, which is contained in the written charter of our Audit Committee,
      has
      been established by our Board of Directors in order to serve the interests
      of
      our shareholders. Related party transactions are reviewed and approved by the
      Audit Committee on a case-by-case basis. Under existing, unwritten policy no
      related party transaction can be approved by the Audit Committee unless it
      is
      first determined that the terms of such transaction is on terms no less
      favorable to us than could be obtained from an unaffiliated third party on
      an
      arms-length basis and is otherwise in our best interest.




*Director
      Independence*




Our
      Board
      is comprised of a majority of independent directors under the rules of the
      SEC
      and the listing standards of NASDAQ. Our independent directors are
      Messrs. Zeitlin, Breslow, and Diaz-Verson. Richard Armbrust, a director in
      fiscal 2007 until resigning in May, 2006, was an independent director and was
      a
      member of the Audit Committee, Nominating Committee and Compensation Committee.
      Sheldon Appel served as a director in fiscal 2007 and resigned in June, 2007.
      Mr. Appel was an independent director and served on the Audit Committee,
      Nominating Committee and Compensation Committee Our Board has determined that
      each member of the Audit Committee, Compensation Committee and Nominating
      Committee is independent under such rules and standards. Messrs. Gagerman and
      Schwartz are not independent directors under applicable SEC rules.




**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 year ended February 28, 2007 and 2006:


**Year
                  Ended February 28,****2007**
              
              **2006**Audit
                  Fees(1)
              
              $
              82,500
              
              $
              82,500Audit-related
                  fees(2)
              
              
              -
              
              
              -Tax
                  fees(3)
              
              
              -
              
              
              -All
                  other fees(4)
              
              
              -
              
              
              -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,
                2007 and 2006.(2)
            
            Includes
                fees for professional services rendered in connection with our evaluation
                of internal controls.




42




**Policy
      on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
      of
      Independent Auditors**





The
      Audit
      Committee pre-approves all audit and permissible non-audit services provided
      by
      our independent auditors. These services may include audit services,
      audit-related services, tax and other services. Pre-approval is generally
      provided for up to one year, and any pre-approval is detailed as to the
      particular service or category of services and is generally subject to a
      specific budget. The independent auditors and management are required to
      periodically report to the Audit Committee regarding the extent of services
      provided by the independent auditors in accordance with this pre-approval,
      and
      the fees for the services performed to date. The Audit Committee may also
      pre-approve particular services on a case-by-case basis. During fiscal 2006
      and
      2007 all services provided by Kabani and Company were pre-approved by the Audit
      Committee in accordance with this policy.




**PART
      IV**




**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**




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




43




**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.




44




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
              __, 2008
            By:
            /s/ Melvin
              GagermanMelvin Gagerman
              Chief Executive Officer




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


Signatures
              
              Title
              
              Date/s/
                  Melvin Gagerman
              
              Chief
                  Executive Officer, Acting Chief Financial Officer Director and
              
              March
                __ , 2008Melvin
                  Gagerman
              
              Chairman
                of the
                Board (Principal Executive Officer, Principal Financial Officer,
                Principal
                Accounting Officer)/s/
                  Arthur Schwartz
              
              Director
              
              March
                __ , 2008Arthur
                  Schwartz/s/
                  Maurice Zeitlin
              
              Director
              
              March
                __ , 2008Maurice
                  Zeitlin/s/
                  Warren Breslow
              
              Director
              
              March
                __ , 2008Warren
                  Breslow/s/
                  Salvador Diaz-Verson, Jr.
              
              Director
              
              March
                __ , 2008Salvador
                  Diaz-Verson, Jr.
  45




**Index
      to Consolidated Financial Statements**




Independent
                Auditors' Reports on Consolidated Financial Statements and Financial
                Statement Schedule
            
            
            F-2Consolidated
                Financial Statements of Aura Systems, Inc. and
                Subsidiaries:Consolidated
                Balance Sheets - February 28, 2007 and February 28, 2006
            
            
            F-3Consolidated
                Statements of Operations - Years ended February 28, 2007, February
                28,
                2006 and February 28, 2005
            
            
            F-4Consolidated
                Statements of Stockholders' Equity (Deficit) - Years ended February
                28,
                2007, February 28, 2006 and February 28, 2005
            
            
            F-5Consolidated
                Statements of Cash Flows - Years ended February 28, 2007, February
                28,
                2006 and February 28, 2005
            
            
            F-6
                to F-8Notes
                to Consolidated Financial Statements
            
            
            F-8
                to F-21Consolidated
                Financial Statement Schedule II: Valuation and Qualifying
                Accounts
            
            
            F-23




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




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 balance sheets of Aura Systems, Inc.
      (a
      Delaware corporation) and subsidiaries as of February 28, 2007 and February
      28,
      2006, and the related consolidated statements of operations, stockholders'
      equity (deficit), and cash flows for each of the three years in the period
      ended
      February 28, 2007. 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, 2007 and February 28, 2006, and the results
      of
      their operations and their cash flows for each of the three years in the period
      ended February 28, 2007 in conformity with accounting principles generally
      accepted in the United States of America.




/s/
      Kabani & Company, Inc.


**Certified
      Public Accountants**





Los
      Angeles, California


September
      12, 2007


F-2




**CONSOLIDATED
      BALANCE SHEETS**




**February
                28, 2007**
            
            **February
                28, 2006****ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            1,051,259
            
            $
            472,482Accounts
                receivable, net of allowance for doubtful accounts of $164,241 and
                $164,241
            
            
            249,984
            
            
            87,808Current
                inventories
            
            
            750,000
            
            
            615,000Other
                receivables
            
            
            -
            
            
            2,654,864Other
                current assets
            
            
            243,854
            
            
            69,690Total
                current assets
            
            
            2,295,097
            
            
            3,899,844Property,
                plant, and equipment, net
            
            
            58,517
            
            
            26,669Non-current
                inventories net of allowance for obsolete inventories of $3,268,374
                and
                $2,967,751
            
            
            3,195,523
            
            
            3,964,864Total
                assets
            
            $
            5,549,137
            
            $
            7,891,377**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            216,225
            
            $
            590,577Current
                portion of notes payable
            
            
            611,411
            
            
            48,766Accrued
                expenses
            
            
            470,092
            
            
            528,192Deferred
                income
            
            
            164,625
            
            
            164,625Total
                current liabilities
            
            
            1,462,353
            
            
            1,332,160Notes
                payable, net of current portion
            
            
            1,983,118
            
            
            2,476,234Total
                liabilities
            
            
            3,445,471
            
            
            3,808,394Commitments
                and contingenciesStockholders'
                equityCommon
                stock, $0.0001par value, 50,000,000 shares authorized, 28,695,638
                and
                24,282,710 issued and outstanding at February 28, 2007 and
                2006
            
            
            2,870
            
            
            2,428Additional
                paid-in capital
            
            
            347,261,713
            
            
            343,073,025Accumulated
                deficit
            
            
            (345,160,917
            )
            
            (338,992,470
            )Total
                stockholders' equity
            
            
            2,103,666
            
            
            4,082,983Total
                liabilities and stockholders' equity
            
            $
            5,549,137
            
            $
            7,891,377





The
        accompanying notes are an integral part of these financial
        statements


F-3




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




For
      the
      Years Ended February 28, 2007, February 28, 2006, and February 28,
      2005




2007
            
            2006
            
            2005Net
                revenues
            
            $
            1,624,074
            
            $
            1,756,105
            
            $
            2,525,431Cost
                of goods sold
            
            
            745,060
            
            
            614,327
            
            
            1,573,116Inventory
                write down
            
            
            419,765
            
            
            439,188
            
            
            2,088,703Gross
                profit
            
            
            459,249
            
            
            702,590
            
            
            (1,136,388
            )Operating
                expensesEngineering,
                research and development
            
            
            1,048,529
            
            
            1,483,247
            
            
            2,482,668Selling,
                general, and administrative
            
            
            5,200,393
            
            
            5,867,388
            
            
            6,886,542Legal
                settlements
            
            
            -
            
            
            267,726
            
            
            2,765,192Impairment
                losses on long-lived assets
            
            
            -
            
            
            -
            
            
            544,510Total
                operating expenses
            
            
            6,248,922
            
            
            7,618,361
            
            
            14,767,615Loss
                from operations
            
            
            (5,789,673
            )
            
            (6,915,771
            )
            
            (13,815,300
            )Other
                income (expense)Impairment
                of investments
            
            
            -
            
            
            -
            
            
            (286,061
            )Gain
                on disposition of assets
            
            
            7,750
            
            
            2,446,798
            
            
            -Interest
                expense, net
            
            
            (392,977
            )
            
            (6,602,020
            )
            
            (18,965,852
            )Other
                income (expense), net
            
            
            6,453
            
            
            (50,000
            )
            
            166,345Change
                in derivative liability
            
            
            -
            
            
            16,254,502
            
            
            4,622,235Bankruptcy
                settlements
            
            
            -
            
            
            1,730,979
            
            
            -Total
                other income (expense)
            
            
            (378,774
            )
            
            13,780,259
            
            
            (14,463,333
            )Net
                Income (Loss) before Minority interest in subsidiary
            
            
            (6,168,447
            )
            
            6,864,488
            
            
            (28,278,633
            )Minority
                interest
            
            
            -
            
            
            -
            
            
            3,970Net
                income (loss) before preferred stock dividend
            
            $
            (6,168,447
            )
            $
            6,864,488
            
            $
            (28,274,663
            )Preferred
                stock dividend
            
            
            -
            
            
            -
            
            
            525,377Net
                Income (Loss) applicable to common shareholders
            
            $
            (6,168,447
            )
            $
            6,864,488
            
            $
            (28,800,040
            )Basic
                and diluted loss per share
            
            $
            (0.25
            )
            $
            2.24
            
            $
            (22.35
            )Weighted-average
                shares outstanding
            
            
            25,114,154
            
            
            3,063,216
            
            
            1,288,114




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 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
            )
            $
            4,082,983Common
                stock issued in private placements
            
            
            -
            
            
            -
            
            
            4,412,928
            
            
            442
            
            
            -
            
            
            3,964,714
            
            
            -
            
            
            3,965,156Issuance
                of warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            223,974
            
            
            -
            
            
            223,974Net
                Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (6,168,447
            )
            
            (6,168,447
            )Balance,
                February 28, 2007
            
            
            -
            
            
            -
            
            
            28,695,638
            
            $
            2,870
            
            
            -
            
            $
            347,261,713
            
            $
            (345,160,917
            )
            $
            2,103,666




The
      accompanying notes are an integral part of these financial
      statements




F-5




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**For
      the Years Ended February 28, 2007, February 28, 2006 and February 28,
      2005**




2007
              
              2006
              
              2005Cash
                  flows from operating activitiesNet
                  income (loss)
              
              $
              (6,168,447
              )
              $
              6,864,488
              
              $
              (28,800,040
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activitiesDepreciation
                  and amortization
              
              
              30,948
              
              
              65,091
              
              
              416,161Gain
                  on disposition of assets
              
              
              (7,750
              )
              
              (2,446,798
              )
              
              -Change
                  in allowance for doubtful accounts
              
              
              2,646
              
              
              88,682
              
              
              32,134Change
                  in reserve for inventory obsolescence
              
              
              419,765
              
              
              439,188
              
              
              2,088,703Impairment
                  of long-lived assets and investments
              
              
              -
              
              
              -
              
              
              830,571Gain
                  on extinguishment of debt
              
              
              -
              
              
              (1,730,979
              )
              
              (17,221
              )Minority
                  interest in net income of consolidated subsidiary
              
              
              -
              
              
              -
              
              
              (3,970
              )Change
                  in derivative liability
              
              
              -
              
              
              (16,254,502
              )
              
              (4,622,235
              )Beneficial
                  conversion feature on convertible debt
              
              
              -
              
              
              3,801,457
              
              
              19,259,334Operating
                  expense charged for warrants issued
              
              
              223,974
              
              
              943,396
              
              
              -Operating
                  expenses satisfied with note payable
              
              
              167,346
              
              
              -
              
              
              -Operating
                  expenses satisfied with stock
              
              
              -
              
              
              300,000
              
              
              750,855(Increase)
                  decrease inAccounts
                  receivable
              
              
              (164,822
              )
              
              460,946
              
              
              12,732Inventories
              
              
              214,576
              
              
              302,760
              
              
              895,628Other
                  current assets
              
              
              2,480,700
              
              
              626,467
              
              
              (437,068
              )Other
                  assets
              
              
              -
              
              
              -
              
              
              594,271Increase
                  (decrease) inAccounts
                  payable and accrued expenses
              
              
              (432,452
              )
              
              1,974,022
              
              
              2,156,666Deferred
                  income
              
              
              -
              
              
              -
              
              
              3,750Net
                  cash used in operating activities
              
              
              (3,233,516
              )
              
              (4,565,782
              )
              
              (6,839,729
              )Cash
                  flows from investing activitiesPurchase
                  of property, plant, and equipment
              
              
              (62,796
              )
              
              -
              
              
              -Proceeds
                  from disposal of property, plant, and equipment
              
              
              7,750
              
              
              -
              
              
              -Net
                  cash used in investing activities
              
              
              (55,046
              )
              
              -
              
              
              -


F-6




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




2007
            
            2006
            
            2005Cash
                flows from financing activitiesProceeds
                from notes payable
            
            
            -
            
            
            -
            
            
            2,150,000Payments
                on notes payable
            
            
            (97,817
            )
            
            (103,727
            )
            
            (778,320
            )Net
                proceeds from issuance of preferred stock
            
            
            -
            
            
            123,461
            
            
            5,446,225Net
                proceeds from issuance of common stock
            
            
            3,965,156
            
            
            4,957,154
            
            
            -Net
                cash provided by financing activities
            
            
            3,867,339
            
            
            4,976,888
            
            
            6,817,905Net
                increase in cash and cash equivalents
            
            
            578,777
            
            
            411,106
            
            
            (21,824
            )Cash
                and cash equivalents, beginning of year
            
            
            472,482
            
            
            61,376
            
            
            83,200Cash
                and cash equivalents, end of year
            
            $
            1,051,259
            
            $
            472,482
            
            $
            61,376Supplemental
                disclosures of cash flow informationInterest
                paid
            
            $
            46,045
            
            $
            550,255
            
            $
            674,383Income
                taxes paid
            
            $
            -
            
            $
            -
            
            $
            -




Supplemental
      schedule of non-cash financing and investing activities:




During
      the year ended February 28, 2007 $167,346 of accrued and unpaid interest was
      added to the principal amount of notes payable.




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




The
      accompanying notes are an integral part of these financial
      statements




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 - 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.




F-8




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. 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, 2007 and
      February 28, 2006 $3,195,523, and $3,964,864, respectively, of inventories
      have
      been classified as long-term assets. (See Note 4.)




**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.




F-9




**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, 2007, 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, $0, and $657,728 for the years ended February 28, 2007, February
      28, 2006 and February 28, 2005, respectively. Accumulated amortization was
      $1,228,061 as of February 28, 2007 and 2006. 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 8).




**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, 2007, February 28,
      2006
      and February 28, 2005:




2007
            
            2006
            
            2005Net
                income (loss), as reported
            
            $
            (6,168,447
            )
            $
            6,864,488
            
            $
            (28,800,040
            )Intrinsic
                value expense
            
            
            -
            
            
            -
            
            
            -Stock-based
                employee compensation expense determined under fair value presentation
                for
                all options
            
            
            -
            
            
            -
            
            
            -Pro
                forma net income (loss)
            
            $
            (6,168,447
            )
            $
            6,864,488
            
            $
            (28,800,040
            )Basic
                income (loss) per common share:As
                reported
            
            $
            (0.25
            )
            $
            2.24
            
            $
            (22.35
            )Pro
                forma
            
            $
            (0.25
            )
            $
            2.24
            
            $
            (22.35
            )




F-10




There
      were no options granted during the years ended February 28, 2005, 2006 and
      2007.




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.




**Advertising
      Expense**




Advertising
      costs are charged to expense as incurred and were immaterial for the years
      ended
      February 28, 2007, February 28, 2006 and February 28, 2005.




**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, 2007 and
      February 28, 2006.




F-11


**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, 2007, we conducted business with two customers
      whose
      sales comprised 24% of net sales. As of February 28, 2007, two customers
      accounted for 39 % of net accounts receivable. 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, four customers accounted for 87% of net
      accounts receivable.




**Recently
      Issued Accounting Pronouncements**




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 management is currently evaluating the effect
      of
      this pronouncement on 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.


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.




F-12




This
      Statement is effective as of the beginning of the Company’s first fiscal year
      that begins after September 15, 2006. The management is currently evaluating
      the
      effect of this pronouncement on 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
      September 2006, FASB issued SFAS 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)
            A
                brief description of the provisions of this Statement


b)
            The
                date that adoption is required


c)
            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. The 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. FASB 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 FASB 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. FASB 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities.




F-13




**NOTE
      3 - INVENTORIES**




Inventories
      at February 28, 2007 and February 28, 2006 consisted of the
      following:




2007
            
            2006Raw
                materials
            
            $
            2,939,395
            
            $
            2,909,930Finished
                goods
            
            
            4,274,502
            
            
            4,637,6857,213,897
            
            
            7,547,615Reserve
                for potential product obsolescence
            
            
            (3,268,374
            )
            
            (2,967,751
            )3,945,523
            
            
            4,579,864Non-current
                portion
            
            
            3,195,523
            
            
            3,964,864Current
                portion
            
            $
            750,000
            
            $
            615,000




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, 2007 and February 28, 2006, 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 $3,268,374 and $2,967,751 at February 28, 2007 and February 28,
      2006,
      respectively.




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




Property,
      plant, and equipment at February 28, 2007 and February 28, 2006 consists of
      the
      following:




2007
            
            2006Machinery
                and equipment
            
            
            903,017
            
            
            911,308Furniture
                and fixtures
            
            
            1,399,636
            
            
            1,509,4922,302,653
            
            
            2,420,800Less
                accumulated depreciation and amortization
            
            
            2,244,136
            
            
            2,394,131Property,
                plant and equipment, net
            
            $
            58,517
            
            $
            26,669




Depreciation
      and amortization expense was $30,948, $65,091, and $416,161 for the years ended
      February 28, 2007, February 28, 2006 and February 28, 2005,
      respectively.




F-14




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
      5 - 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, 2007 and 2006, we have fully written off all our long-term
      investments.




**NOTE
      6 - NOTES PAYABLE**




Notes
      payable at February 28, 2007 and 2006 consisted of the following:




2007
            
            2006Note
                payable (a)
            
            $
            2,594,529
            
            $
            2,525,000Less
                current portion
            
            
            611,411
            
            
            48,766Long-term
                portion
            
            $
            1,983,118
            
            $
            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. During the year ended February 28, 2007, $167,346 in accrued and unpaid
      interest was added to the principal balance of the notes.




Future
      maturities of notes payable at February 28, 2007 are as follows:




Year
                Ending February 28,2008
            
            $
            611,4112009
            
            
            655,6102010
            
            
            703,0042011
            
            
            624,504Total
            
            $
            2,594,529




F-15




**NOTE
      7 - ACCRUED EXPENSES**




Accrued
      expenses at February 28, 2007 and February 28, 2006 consisted of the
      following:




2007
            
            2006Accrued
                payroll and related expenses
            
            $
            324,636
            
            $
            178,170Accrued
                interest
            
            
            
            
            
            16,833Other
            
            
            145,456
            
            
            333,189Total
            
            $
            470,092
            
            $
            528,192




**NOTE
      8 - COMMITMENTS AND CONTINGENCIES**




**Leases**




At
      February 28, 2007, we did not have any significant long-term operating leases.
      Rent expense charged to operations amounted to $268,380, $858,368, and $838,458
      for the years ended February 28, 2007, February 28, 2006 and February 28, 2005,
      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
      9 - STOCKHOLDERS' EQUITY**




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.




As
      part
      of the reorganization plan, all Series A and Series B Preferred Stock was
      converted into common stock of the reorganized company. As of February 28,
      2007,
      there is no outstanding preferred stock.




F-16




**Common
        Stock**
  At
        February 28, 2007, 2006 and 2005, we had 50,000,000 shares of $0.0001 par
        value
        common stock authorized for issuance. During the years ended February 28,
        2007
        and 2006, we issued 4,412,928 and 24,282,710 shares of common stock,
        respectively.


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
      year ended February 28, 2006, we issued 24,282,710 shares of common stock 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




·
            644,401
                issued for legal settlements




·
            6,065,699
                shares for DIP financing




·
            3,349,500
                shares for new money contribution




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.




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.




**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 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




**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.




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.




F-17




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, 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




**Warrants**




As
      of
      February 29, 2005, 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 intended 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 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
            
            $
            3.50Issued
            
            
            1,155,589
            
            $
            2.00-3.00Outstanding,
                February 28, 2007
            
            
            6,178,537
            
            $
            2.00-3.50




F-18




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




During
      the year ended February 28, 2007, we issued 1,155,589 warrants with exercise
      prices ranging from $2.00 to $3.00, and vesting periods of three to five
      years.




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.




The
      exercise prices for the warrants outstanding at February 28, 2007, 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$3.50
            
            5,022,945
            
            5,022,945
            
            47
                months
            
            $3.50
            
            $3.50
            
            $0.00$2.00-$3.00
            
            1,155,589
            
            893,089
            
            59
            
            $2.71
            
            $2.80
            
            $0.00




**NOTE
      10 - 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, 2007 and February 28, 2006 and February 28, 2005:




2007
            
            2006
            
            2005Expected
                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, 2007 and February 28, 2006:




2007
            
            2006Deferred
                tax assetNet
                operating loss carryforward
            
            
            119,900,000
            
            
            115,500,000Valuation
                allowance
            
            
            (119,900,000
            )
            
            (115,500,000
            )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, 2007, we had operating loss carryforwards
      of approximately $299,600,000, which expire through 2022.




F-19




**NOTE
        11 - 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, 2007, February 28, 2006 and February
        28,
        2005.
  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
        $8,196, $10,552 and $17,863 for the years ended February 28, 2007, February
        28,
        2006 and February 28, 2005, respectively.




**NOTE
      12 - 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, 2007 and February 28, 2006 and February 28, 2005:




2007
            
            2006
            
            2005United
                States
            
            $
            1,416,145
            
            $
            1,583,509
            
            $
            2,420,136Canada
            
            
            198,737
            
            
            105,243
            
            
            43,523Europe
            
            
            4,948
            
            
            7,246
            
            
            7,826Asia
            
            
            4,244
            
            
            60,107
            
            
            53,946Total
            
            $
            1,624,074
            
            $
            1,756,105
            
            $
            2,525,431




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




The
      following tables list our quarterly financial information for the years ended
      February 28, 2007, February 28, 2006 and February 28, 2005:




2007First
              Quarter
            
            Second
                Quarter
            
            Third
              Quarter
            
            Fourth
                Quarter
            
            Total
              YearNet
                revenues
            
            $
            244,462
            
            $
            591,898
            
            $
            354,109
            
            $
            433,605
            
            $
            1,624,074Gross
                profit
            
            $
            13,306
            
            $
            400,010
            
            $
            145,098
            
            $
            (99,165
            )
            $
            459,249Loss
                from operations
            
            $
            (1,434,293
            )
            $
            (1,347,389
            )
            $
            (1,443,631
            )
            $
            (1,564,360
            )
            $
            (5,789,673
            )Net
                loss
            
            $
            (1,455,780
            )
            $
            (1,377,724
            )
            $
            (1,652,910
            )
            $
            (1,682,033
            )
            $
            (6,168,447
            )Basic
                and diluted loss per share
            
            $
            (0.06
            )
            $
            (0.06
            )
            $
            (0.06
            )
            $
            (0.07
            )
            $
            (0.25
            )




F-20





2006First
              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




2005First
              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
            )




F-21




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.





/s/
      Kabani & Company, Inc.


**Certified
      Public Accountants**





Los
      Angeles, California


September
      12, 2007




F-22




**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, 2007
            
            $
            164,241
            
            $
            -
            
            $
            -
            
            $
            164,241February
                28, 2006
            
            $
            2,220,474
            
            $
            -
            
            $
            2,056,233
            
            $
            164,241February
                28, 2005
            
            $
            2,188,340
            
            $
            86,537
            
            $
            54,403
            
            $
            2,220,474**Reserve
                for obsolete inventories (see Note 5)**February
                28, 2007
            
            $
            2,967,751
            
            $
            300,623
            
            $
            -
            
            $
            3,268,374February
                28, 2006
            
            $
            4,038,047
            
            $
            -
            
            $
            1,070,296
            
            $
            2,967,751February
                28, 2005
            
            $
            2,032,000
            
            $
            2,006,047
            
            $
            -
            
            $
            4,038,047**Reserve
                for investment (see Note 8)**February
                28, 2007
            
            $
            2,987,640
            
            $
            -
            
            $
            -
            
            $
            2,987,640February
                28, 2006
            
            $
            2,987,640
            
            $
            -
            
            $
            -
            
            $
            2,987,640February
                28, 2005
            
            $
            2,701,579
            
            $
            286,061
            
            $
            -
            
            $
            2,987,640




F-23