EXHIBIT 10.26

                             CONVERTIBLE DEMAND NOTE

                   THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
                 SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
                  BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF
                EXCEPT WHILE SUCH A REGISTRATION IS IN EFFECT OR
                   PURSUANT TO AN EXEMPTION FROM REGISTRATION
                                 UNDER SAID ACT

                               AURA SYSTEMS, INC.
                                 as the Borrower

$501,573.00                                               El Segundo, California
                                                                January 17, 2003


     FOR VALUE  RECEIVED,  the  undersigned,  AURA  SYSTEMS,  INC.,  a  Delaware
corporation (herein called the "Borrower"), whose principal office is located at
2335 Alaska  Avenue,  El  Segundo,  California  90245,  hereby  irrevocably  and
unconditionally  promises  to pay to the  order of THE  PRUDENT  BEAR  FUND (the
"Holder"),  at 8140 Walnut Hill Lane,  Suite 300,  Dallas,  TX 72231,  or to its
successors  and  registered  assigns,  in lawful  money of the United  States of
America,  in immediately  available funds, the principal sum of Five Hundred One
Thousand Five Hundred  Seventy-Three  Dollars ($501,573.00) plus all accrued and
unpaid  interest,  all on demand,  but in no event  later  than March 31,  2003.
Interest  payable  hereunder  shall be  calculated  at the rate of five  percent
(5.00%) per annum on the principal amount  outstanding on the basis of a 360-day
year and the actual number of days elapsed. Accrued but unpaid interest shall be
payable, in cash, on March 31, 2003.

     All amounts due hereunder  shall be paid to the Holder in U.S.  Dollars and
in  immediately  available  funds before 1:00 p.m., Los Angeles time, on demand,
or, if later,  on the due date,  March 31,  2003 as  directed  in writing by the
Holder.

     This Note is convertible into shares of Borrower's  Convertible  Redeemable
Preferred  Stock  ("Preferred  Stock")  with  each  dollar  of this  Note  being
converted into $1.00 of Preferred Stock.

     In the event that any amount of  principal  of or  interest on this Note is
not paid when due, then interest on any such past due amount shall be payable at
a rate per annum equal to the  greater of the  following:  (i)  fifteen  percent
(15%), or (ii) the rate announced by Citibank,  N.A., New York branch, as of the
relevant date as "prime" plus five percent (5%).

     Upon the  occurrence  of any  default or breach by the  Borrower  under the
Note, the entire principal amount hereof and the interest thereon to the date of
payment shall become immediately due and payable without further notice, and the
Borrower hereby waives all rights to notice and presentment.

     The Borrower  hereby waives  diligence,  presentment,  demand,  protest and
notice of every  kind,  and  warrants  to the  Holder of this Note  that,  as to
itself,  all actions and  approvals  required for the  execution and delivery of
this  Note as the  legal,  valid  and  binding  obligation  of the  undersigned,
enforceable  in  accordance  with the terms  hereof,  have  been duly  taken and
obtained.  The  non-exercise by the Holder of any of its rights hereunder in any
particular  instance  shall  not  constitute  a  waiver  thereof  in that or any
subsequent  instance.  A manually  signed copy of this Note shall be evidence of
the  rights of the Holder of this  Note.  This Note  shall be  binding  upon the
Borrower and its  successors  and assigns and inure to the benefit of the holder
of this Note and its successors and permitted assigns.

I. REPRESENTATIONS AND WARRANTIES

     A.   Borrower represents and warrants to the Holder that:

          (i)  Borrower  has all  requisite  corporate  power and  authority  to
               deliver and perform its obligations under this Note.

          (ii) The execution, delivery, and performance by Borrower of this Note
               has been duly  authorized  by all necessary  corporate  action of
               Borrower  and does not and will not  (A) contravene  the terms of
               the Certificate of  Incorporation or Bylaws of Borrower or result
               in a breach of or  constitute  a default  under any  indenture or
               loan or  credit  agreement  or any  other  agreement,  lease,  or
               instrument  to  which  Borrower  is a party or by which it or its
               assets may be bound or affected, (B) violate any provision of any
               law, rule, regulation, order, writ, judgment,  injunction, decree
               or like  instrument  binding  on or  affecting  Borrower,  or (C)
               result in, or require,  the  creation or  imposition  of any lien
               upon or with respect to any of the assets of Borrower.

          (iii)This Note constitutes a legal,  valid, and binding  obligation of
               Borrower,  enforceable  against  Borrower in accordance  with its
               terms.

          (iv) No authorization,  consent,  approval,  license, exemption of, or
               filing or  registration  with,  any  governmental  authority,  or
               approval or consent of any other person,  is required for the due
               execution,  delivery,  or  performance  by Borrower of this Note,
               except for the filing of the Certificate of Designation  attached
               hereto with the Delaware Secretary of State.

          (v)  Borrower  has a  pre-existing  relationship  with  Holder and, by
               reason of its business and financial experience, Borrower has the
               capacity to protect its own interests in connection with the Note
               and related transactions.


     B.   Holder represents and warrants to Borrower that:

          (i)  Holder is  acquiring  the shares (the  "Securities")  for its own
               account,  for  investment  and  not  with a  view  to  resale  or
               distribution.  Holder has not  offered or sold any portion of its
               Securities   and  has  no  present   intention  of  dividing  its
               Securities  with any third  party or of  reselling  or  otherwise
               disposing of any portion  thereof  either  currently or after the
               passage  of a fixed or  determinable  period  of time or upon the
               occurrence  of  non-occurrence  of  any  predetermined  event  or
               circumstance.

          (ii) Holder is aware that the Securities are  speculative  and that it
               may lose its  entire  investment  and it can  afford  to bear the
               risks of an investment in Borrower's  company  ("Borrower" or the
               "Company"), including the risk of losing its entire investment.

          (iii) Holder:

               (a)  Has been  provided  an  opportunity  to  obtain  information
                    concerning  the  Company and any other  relevant  matters as
                    Holder has requested; and

               (b)  Has been  given  the  opportunity  to ask  questions  of and
                    receive answers from the Company concerning the Securities.

          (iv) Holder  is  aware  that it must  bear  the  economic  risk of its
               investment in the  Securities  for an  indefinite  period of time
               because:  (1) the Securities have not been  registered  under the
               Securities  Act of 1933,  as amended  (the  "Act"),  or qualified
               under  the  California  Corporate  Securities  Law of 1968 or any
               other  state  securities  laws,  and  therefore  cannot  be sold,
               assigned or otherwise disposed of unless  appropriate  exemptions
               from  such   registration  or   qualification   requirements  are
               available;  (2) Borrower will place a legend on the  certificates
               evidencing  the  Securities  (unless  and  until  a  Registration
               Statement  covering the Securities is in effect) stating that the
               Securities  have not been  registered  under the Act or any state
               securities  laws and  setting  forth  the  limitations  on resale
               contained above and Borrower will also require that its registrar
               and transfer  agent make a notation of such  restrictions  in its
               appropriate  records  and  (3)  there  is no  public  market  for
               Preferred Shares.  Holder further understands and agrees that the
               Borrower  will not honor any attempt by Holder to sell,  transfer
               of otherwise  dispose of the  Securities in the absence of either
               an  effective  Registration  Statement  and  qualification  under
               applicable Blue Sky laws or exemptions therefrom.

          (v)  Holder   acknowledges  that  a  legend  will  be  placed  on  any
               certificates or instruments evidencing the Securities for as long
               as  necessary  to  comply  with  the  Act  and  applicable  state
               securities laws.

          (vi) Holder is an  "accredited  investor"  as such term is  defined in
               Regulation  D  under  the  Act.  Holder  is   knowledgeable   and
               experienced with respect to investment matters such as a proposed
               purchase of Securities.  Holder has such knowledge and experience
               in business and financial  matters as to be capable of evaluating
               the merits and risks of this  investment  and has the capacity to
               protect its own interests in connection with this investment.

          (vii)Holder has decided to acquire the  Securities on the basis of its
               own  independent   investigation   and  has  relied  on  no  oral
               statements,   representations   or  warranties  of  the  Company,
               including its agents, consultants or employees, as to the quality
               of the investment in the Securities.

          (viii) Holder shall be entitled to registration  rights for the resale
               of the  Securities  on  the  terms  set  forth  in the  Company's
               Certificate  of  Designation  as filed with the State of Delaware
               and subject to the letter agreement set forth above.

          (ix) In the  event  of a stock  split,  reverse  stock  split or other
               recapitalization,  appropriate  adjustments  shall be made in the
               number of shares  and/or  per share  price in order to effect the
               intent and purpose of the applicable provisions

iI. Miscellaneous

     Notices.  Notice to Holder  shall be deemed to be provided on the day it is
posted by email,  fax and  overnight  mail to the Holder's  address on file with
Borrower.  Holder shall use its best efforts to insure Holder actually  receives
on a timely basis any notice provided hereunder.

     Successors  and  Assigns.  The rights and  obligations  of Borrower and the
Holder of this  Note  shall be  binding  upon and  inure to the  benefit  of the
successors, assigns and transferees of the parties.

     Waiver and Amendment.  Any provision of this Note may be amended, waived or
modified upon the written consent of Borrower and the Holder.

     Assignment by Borrower.  Neither this Note nor any of the rights, interests
or obligations hereunder may be assigned,  by operation of law or otherwise,  in
whole or in part, by Borrower, without the prior written consent of the Holder.

     Expenses;   Waivers.  If  Borrower  defaults  in  the  performance  of  its
obligations  under this Note,  then  Borrower  shall pay all costs and  expenses
incurred  by Holder in  connection  with the  collection  of amounts due and the
enforcement  of  Holder's  rights  hereunder  and under the  Security  Agreement
including, without limitation, reasonable attorneys' fees and costs.

     Consent  to  Jurisdiction.  Borrower  hereby  irrevocably  submits  to  the
non-exclusive jurisdiction of the state and federal courts in and for the County
of Los Angeles,  California,  for the purposes of any suit, action or proceeding
arising  out of or relating  to this Note and hereby  waives,  and agrees not to
assert  in any such  suit,  action,  or  proceeding,  any  claim  that it is not
personally subject to the jurisdiction of such courts,  that the suit, action or
proceeding is brought in an  inconvenient  forum, or that the venue of the suit,
action or proceeding is improper.  Borrower  consents to process being served in
any suit, action or proceeding by overnight mail, next business day delivery, by
a commercially  recognized overnight mail delivery service, of a copy thereof to
Borrower at the address set forth on the first page of this Note,  and  Borrower
agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing in this paragraph shall affect or limit any right to
serve process in any other matter permitted by law.

     No  Impairment.  Borrower will not avoid or seek to avoid the observance or
performance  of any of the  terms  to be  observed  or  performed  hereunder  by
Borrower,  but will at all times in good faith carry out the  provisions of this
Note.

     Governing  Law.  This  Note  shall in all  respects  be  governed  by,  and
construed in accordance with, the laws of the State of California  including all
matters  of  construction,   validity  and  performance,  without  reference  to
principles of conflicts of law.

     IN WITNESS  WHEREOF,  the Borrower has caused this Note to be duly executed
by a duly authorized officer on the day and the year first above written.


                               AURA SYSTEMS, INC.



                     By:   /s/ David A. Rescino
                             --------------------
                    Name:    David A. Rescino
                    Title:   Senior VP / CFO