**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 29, 2008


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, a non-accelerated filer or a smaller reporting company (as
      defined in Rule 12b-2 of the Act).




Large
      Accelerated Filer  ̈ Accelerated Filer  ̈ Non-accelerated filer x Smaller
      Reporting Company  ̈





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, 2007 the aggregate market value of the voting stock held by non-affiliates
      of the Registrant was approximately $46 million. The aggregate market value
      has
      been computed by reference to the last trading price of the stock on August
      31,
      2007.




On
      May
      15, 2008, the Registrant had 39,228,226 shares of common stock
      outstanding.


2




**TABLE
      OF CONTENTS**




**PART
                I**ITEM
                1. BUSINESS
            
            5ITEM
                1A. RISK FACTORS
            
            12ITEM
                2. PROPERTIES
            
            15ITEM
                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
            
            16ITEM
                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
            
            27ITEM
                8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
            
            27ITEM
                9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            
            27ITEM
                9A(T). 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
            
            40ITEM
                13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE
            
            40ITEM
                14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
            
            41**PART
                IV**ITEM
                15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
            
            42SIGNATURES
            
            44


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. In Fiscal 2008, 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. Also in
      Fiscal 2008, the AuraGen was installed on a number of boats 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 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. By early 1999, NewCom had ceased
      operations and closed down.




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 continued to downscale our operations.
      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.




In
      May
      2008, we entered into an agreement with Emerald Commercial Leasing, Inc., of
      Conley, Georgia, whereby we acquired the transport refrigeration assets of
      Emerald, valued at approximately $385,000. The terms of the agreement call
      for
      payment for the acquired inventory as it is sold. In addition, we reached an
      agreement in principle to purchase their service facility for $1,050,000. The
      facility consists of approximately 6 acres of land and a building of
      approximately 10,000 square feet with several truck service bays and a small
      amount of office space. The facility will be used by Aura for warehousing,
      service, and installation of the AuraGen for customers in the southeastern
      United States. Until the acquisition of the facility is finalized, including
      the
      assumption or refinancing of the approximately $950,000 in mortgage debt, Aura
      will pay approximately $7,000 per month in rent for the facility. The agreement
      also assigns to Aura all rights to drawings, designs, sketches, layouts
      integration know-how, parts lists, and vendor lists for the all electric
      refrigeration system based on commercial refrigeration design. In addition,
      the
      agreement returns the previously assigned exclusive selling rights for the
      transport refrigeration industry to Aura. As a result, Aura can now offer an
      end-to-end solution to its customers in the refrigeration truck industry. We
      also agreed to hire eight of the employees of Emerald, effective June 1, 2008,
      and entered into an employment agreement with Emerald’s President, Mr. Joseph
      Dickman, effective August 1, 2008, which employs Mr. Dickman as Vice President
      of Sales.


5




**The
      AuraGen** **®**




The
      AuraGen ® is
      composed of three basic subsystems. The first subsystem is the generator that
      is
      bolted to, and driven by, the vehicle's engine. The second subsystem 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, the transport refrigeration 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.


8




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.




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 expect to be able
      to
      move into this facility in the second quarter of fiscal 2009, and terminate
      the
      month-to-month lease on our current facilities at that time. We feel this
      facility is sufficient for our current needs. We plan to expand our
      manufacturing and warehouse capacity during fiscal 2009 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. Subsequent to year-end we entered into negotiations to acquire a service
      and installation facility in Conley, Georgia. The facility consists of
      approximately 6 acres of land and a building of approximately 10,000 square
      feet
      with several truck service bays and a small amount of office space. The facility
      will be used by Aura for warehousing, service, and installation of the AuraGen
      for customers in the southeastern United States. We expect to complete this
      acquisition in the second quarter of fiscal 2009.


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, for military applications, our
      dual system and our Tamgen (two generators connected in tandem) system, which
      generate up to 16,000 watts of continuous power with both AC and DC
      simultaneously. We are now shipping commercial units with 200amp, 24VDC
      capabilities and have completed the design and are currently testing units
      that
      are approximately 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.


10




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.




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 orientations 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 May
      31, 2008, we employed 59persons. We are not a party to any collective bargaining
      agreements .




**Significant
      Customers**




During
      the year ended February 29, 2008 we conducted business with three
      major customers whose net sales comprised 42 % of our net sales. As of
      February 29, 2008, three customers accounted for 30% of our net accounts
      receivable.




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.


11




**Backlog**




As
      of May
      1, 2008, we had a backlog of approximately $5.5 million. Of this amount,
      approximately $4.2 million is for delivery after the 2009 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.




**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 $350 million from our inception
      through February 29, 2008. Since emerging from bankruptcy, we have incurred
      approximately $15 million in losses. 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. 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 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 be forced to make 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
        auditors have qualified their reports on our financial statements to indicate
        that there is substantial doubt as to our ability to continue as a going
        concern, which could adversely affect our ability to obtain third party
        financing.***
 
 Our
        auditors, Kabani and Company, have qualified their reports on the current
        financial statements to indicate that there is “substantial doubt” about our
        ability to continue as a going concern. This opinion is based upon our
        continuing losses from operations. The existence of the going concern
        qualification could affect our ability to obtain financing from third parties
        or
        could result in increased cost of this financing.




***Our
      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 mobile power solutions in the 3,000
      to 25,000 watts range, 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
      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.




***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.


12




***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.




***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.


13




***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 de-listed 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
      March 2008, we failed to timely file quarterly reports on Form 10-Q and Annual
      Reports on Form 10-K. This delay was caused by inadequate financial resources,
      culminating in our filing for reorganization under Chapter 11 of the U.S.
      Bankruptcy Code in June 2005. We emerged from Chapter 11 under a court approved
      reorganization plan on January 31, 2006. We filed all of our delinquent reports
      in March of 2008, and on April 15, 2008, we were listed on the OTCBB under
      the
      symbol AUSI. 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, which in turn could adversely affect the market liquidity of our common
      stock.





***We
      may issue additional shares of our authorized common stock without obtaining
      the
      approval of our stockholders.***





As
      of the
      date of this report, our corporate charter currently authorized our Board of
      Directors to issue up to 50,000,000 shares of common stock, of which 39,228,226
      shares were outstanding as of May 15, 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.


14





***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
      February 29, 2008, we had outstanding 8,471,679 options and warrants to purchase
      our common stock at exercise prices ranging between $2.00 and $4.00. 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
      May 15, 2008, the closing price of our common stock was $1.04 per share. The
      existence of such rights to acquire common stock at fixed prices may prove
      a
      hindrance to our efforts to raise future equity funding, and the exercise of
      such rights will dilute the percentage ownership interest of our stockholders
      and may dilute the value of their ownership. Future sale of shares issuable
      on
      the exercise of outstanding warrants and options at fixed prices below
      prevailing market prices, or expectations of such sales, could adversely affect
      the prevailing market price of our common stock, particularly since such
      warrants or options may be exercised at a fixed price and resold. Further,
      the
      holders of the outstanding warrants may exercise them at a time when we would
      otherwise be able to obtain additional equity capital on terms more favorable
      to
      us.





***We
      do not expect to pay dividends on our common stock in the foreseeable future.***





Although
      our stockholders may receive dividends if, as and when declared by our Board
      of
      Directors, we do not presently intend to pay dividends on our common stock
      until
      we are able to generate revenues and profits on a sustained basis and available
      cash exceeds our working capital requirements. Therefore, you should not
      purchase our common stock if you need immediate or future income by way of
      dividends from your investment.




**ITEM
      2. PROPERTIES**




Effective
      December 31, 2007, the lease on our current facility expired and we are now
      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 expect to move into this new facility in the
      second quarter of fiscal 2009 and at that time vacate our present facility.
      The
      Company is also negotiating to purchase the service and installation facilities
      of Emerald, which comprisesapproximately 6 acres of land and a building
      of approximately 10,000 square feet with several truck service bays and a small
      amount of office space. The facility will be used by Aura for warehousing,
      service, and installation of the AuraGen for customers in the southeastern
      United States. Until the acquisition of the facility is finalized, including
      the
      assumption or refinancing of the approximately $950,000 in mortgage debt, Aura
      will pay approximately $7,000 per month in rent for the facility. If our sales
      continue to increase as we anticipate, we will need to further expand our
      facilities to meet required production levels.


15




**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 2008.




**PART
      II**




**ITEM
      5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES**




Our
      shares are listed on the OTC Bulletin Board 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 3,319 stockholders
      of
      record as May 15, 2008.


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


16


Period
              
              High
              
              LowFiscal
                  2008First
                  Quarter ended May 31, 2007
              
              $
              1.80
              
              $
              1.21Second
                  Quarter ended August 31, 2007
              
              $
              1.46
              
              $
              0.85Third
                  Quarter ended November 30, 2007
              
              $
              1.73
              
              $
              1.35Fourth
                  Quarter ended February 29, 2008
              
              $
              2.36
              
              $
              1.55




On
      May
      15, 2008, the reported closing sales price for our common stock was
      $1.04.




**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.




**Sales
      of Unregistered Securities**




During
      the three months ended February 29, 2008, we sold 531,858 shares of our common
      stock to private investors for proceeds of $519,267. In January, 2008, we sold
      $704,000 of 7% convertible debentures to private investors. The debentures
      are
      convertible into our common stock at the option of the holder at a price of
      $3
      per share, and are for a term of five years. If the closing price of our stock
      exceeds two times the conversion price ($6) for fifteen consecutive trading
      days, the debenture will automatically be converted into shares of our common
      stock. For additional information regarding the debentures see Managements
      Discussion and Analysis. 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.




**Repurchases
      of Equity Securities**




We
      did
      not repurchase any shares of our common stock during the fourth quarter of
      fiscal 2008.




**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.


17




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




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




AURA SYSTEMS, INC.




$100
      INVESTED ON 2/28/2003 IN STOCK OR INDEX-INCLUDING REINVESTMENT OF DIVIDENDS.
      FISCAL YEAR ENDING FEBRUARY 28




Cumulative
      Total Return and Year to Year Percent Return




Feb-03
            
            Feb-04
            
            Feb-05
            
            Feb-06
            
            Feb-07
            
            Feb-08AURA
                SYSTEMS, INC.
            
            
            Cum
                ret
            
            $
            100.00
            
            $
            88.16
            
            $
            54.26
            
            $
            16.30
            
            $
            8.27
            
            $
            9.03Year to Year %ROI
            
            
            -79
            
            
            -12
            
            
            -38
            
            
            -70
            
            
            -49
            
            
            9NASDAQ
                STOCK MARKET INDEX (U.S.)
            
            
            Cum
                ret
            
            $
            100.00
            
            $
            151.76
            
            $
            153.40
            
            $
            170.57
            
            $
            180.64
            
            $
            174.32Year to Year %ROI
            
            
            -26
            
            
            52
            
            
            1
            
            
            11
            
            
            6
            
            
            -4S
                & P SC INDUSTRIAL 600
            
            
            Cum
                ret
            
            $
            100.00
            
            $
            79.81
            
            $
            123.17
            
            $
            143.56
            
            $
            176.39
            
            $
            158.19Year to Year %ROI
            
            
            7
            
            
            -20
            
            
            54
            
            
            17
            
            
            23
            
            
            -10




† 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.


18


**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 29,
                2008
              
              February 28,
                2007
              
              February 28,
                2006
              
              February 28,
                2005
              
              February 29,
                2004Net
                  revenues
              
              $
              2,849,331
              
              $
              1,624,074
              
              $
              1,756,105
              
              $
              2,525,431
              
              $
              1,864,325Cost
                  of goods sold
              
              $
              1,746,361
              
              $
              745,060
              
              $
              614,327
              
              $
              1,573,116
              
              $
              934,769Inventory
                  write down
              
              $
              52,675
              
              $
              419,765
              
              $
              439,188
              
              $
              2,088,703
              
              $
              550,968Gross
                  profit (loss)
              
              $
              1,050,295
              
              $
              459,249
              
              $
              702,590
              
              $
              (1,136,388
              )
              $
              378,588Expenses:Engineering,
                  research & development
              
              $
              1,541,617
              
              $
              1,048,529
              
              $
              1,483,247
              
              $
              2,482,678
              
              $
              2,135,061Selling,
                  general and administrative
              
              $
              8,246,812
              
              $
              5,200,393
              
              $
              5,867,388
              
              $
              6,061,542
              
              $
              7,191,925Class
                  action litigation & other legal settlements
              
              $
              -
              
              $
              -
              
              $
              267,726
              
              $
              2,765,192
              
              $
              -Impairment
                  losses on long-lived assets
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              544,510
              
              $
              2,000,398Total
                  expenses
              
              $
              9,788,429
              
              $
              6,248,922
              
              $
              7,618,361
              
              $
              12,678,912
              
              $
              11,327,384Loss
                  from operations
              
              $
              (8,738,134
              )
              $
              (5,789,673
              )
              $
              (6,915,771
              )
              $
              (13,815,300
              )
              $
              (10,948,796
              )Other
                  (income) and expense:Impairment
                  of investments
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              286,061
              
              $
              500,000Loss
                  on sale of minority interest in Aura Realty
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              231,000Gain
                  (loss) on sale of investments/assets
              
              $
              1,500
              
              $
              7,750
              
              $
              (2,446,798
              )
              $
              -
              
              $
              (201,061
              )Interest
                  expense
              
              $
              (168,607
              )
              $
              (392,977
              )
              $
              6,602,020
              
              $
              18,965,852
              
              $
              2,409,732Other
              
              
              28,640
              
              $
              6,453
              
              $
              (50,000
              )
              $
              (166,345
              )
              $
              129,337Loss
                on settlement of debt
              
              $
              (84,425
              )
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Change
                  in derivative liability
              
              $
              -
              
              $
              -
              
              $
              16,254,502
              
              $
              (4,622,235
              )
              $
              -Provision
                  (benefit) for taxes
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Minority
                  interest
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (3,970
              )
              $
              (365,514
              )Gain
                  on extinguishment of debt obligations, net of income taxes
              
              $
              -
              
              $
              -
              
              $
              1,730,979
              
              $
              -
              
              $
              67,415Preferred
                  stock dividend
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              525,377
              
              $
              -Net
                  Income (loss)
              
              $
              (8,960,486
              )
              $
              (6,168,447
              )
              $
              6,864,488
              
              $
              (28,800,040
              )
              $
              (13,584,875
              )Net
                  loss per common share
              
              $
              (0.28
              )
              $
              (0.25
              )
              $
              2.24
              
              $
              (22.35
              )
              $
              (10.65
              )Weighted
                  average number of common shares
              
              
              32,252,902
              
              
              25,114,154
              
              
              3,063,216
              
              
              1,288,114
              
              
              1,276,056Cash/cash
                  equivalents
              
              $
              37,532
              
              $
              1,051,259
              
              $
              472,482
              
              $
              61,376
              
              $
              83,200Working
                  capital
              
              $
              48,314
              
              $
              832,744
              
              $
              2,567,684
              
              $
              (34,338,147
              )
              $
              (14,011,245
              )Total
                  assets
              
              $
              5,258,627
              
              $
              5,549,137
              
              $
              7,891,377
              
              $
              13,305,777
              
              $
              17,760,733Total
                  debt
              
              $
              4,462,233
              
              $
              4,907,824
              
              $
              5,140,554
              
              $
              36,535,119
              
              $
              15,545,829Net
                  stockholders’ equity (deficit)
              
              $
              796,394
              
              $
              2,103,666
              
              $
              4,082,983
              
              $
              (23,883,233
              )
              $
              (3,614,425
              )




19




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




**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.




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”. Completion of the 2004
      Recapitalization Transactions was intended to provide us with a more stable
      financial condition by infusing new capital 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.




20




In
      May
      2008, we entered into an agreement with Emerald Commercial Leasing, Inc., of
      Conley, Georgia, whereby we acquired the transport refrigeration assets of
      Emerald, valued at approximately $385,000. The terms of the agreement call
      for
      payment for the acquired inventory as it is sold. In addition, we reached an
      agreement in principle to purchase their service facility for $1,050,000. The
      facility consists of approximately 6 acres of land and a building of
      approximately 10,000 square feet with several truck service bays and a small
      amount of office space. The facility will be used by Aura for warehousing,
      service, and installation of the AuraGen for customers in the southeastern
      United States. Until the acquistion of the facility is finalized, including
      the
      assumption or refinancing of the approximately $950,000 in mortgage debt, Aura
      will pay approximately $7,000 per month in rent for the facility. The agreement
      also assigns to Aura all rights to drawings, designs, sketches, layouts
      integration know-how, parts lists, and vendor lists for the all electric
      refrigeration system based on commercial refrigeration design. In addition,
      the
      agreement returns the previously assigned exclusive selling rights for the
      transport refrigeration industry to Aura. As a result, aura can now offer an
      end-to-end solution to its customers in the refrigeration truck industry. We
      also agreed to hire eight of the employees of Emerald, effective June 1, 2008,
      and entered into an employment agreement with Emerald’s President, Mr. Joseph
      Dickman, effective August 1, 2008, which employs Mr. Dickman as Vice President
      of Sales.




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.




*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.




21




*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 collectability 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**




**Fiscal
      2008 compared to Fiscal 2007**




***Revenues***




Net
      revenues in fiscal 2008 increased $1,225,257 to $2,849,331 from $1,624,074
      in
      fiscal 2007, an increase of 75%. The increase is primarily attributable to
      the
      expansion of our customer base. In the 2008 fiscal year we began shipping
      product to the trucking industry for use on refrigeration trucks, which totaled
      approximately $450,000 in sales. We also delivered the first units for use
      on
      military vehicles in South Korea for total sales of approximately $300,000.
      We
      expect our sales to continue to increase significantly as we expand our sales
      force and our customer base.




*Cost
      of Goods*




Cost
      of
      goods sold in fiscal 2008 increased $1,001,301 to $1,746,361 from $745,060
      in
      fiscal 2007. As a percentage of net revenues, cost of goods sold increased
      to
      61% in fiscal 2008 from 46% in fiscal 2007. The increase is attributable to
      the
      variation in the mix of products sold. There were a larger number of 5KW systems
      sold in the 2008 fiscal year, which carry a lower gross margin than our 8.5
      KW
      systems. These systems were sold at lower margins to reduce our inventory of
      5KW
      systems as we expect most of our customers to move towards the 8.5KW systems
      in
      the future. We expect cost of goods sold to decrease as a percentage of revenues
      as we deplete our inventory of 5KW units.




22




*Engineering,
      Research and Development*




Engineering,
      research and development costs increased $493,088 to $1,541,617 in fiscal 2008
      from $1,048,529 in fiscal 2007. The increase is attributable to an increase
      in
      the number of employees and a renewed focus in product development. During
      the
      2008 fiscal year we developed the Tamgen, the 200 amp ECU, the eight inch
      generator, and designed and built prototypes of smaller diameter
      units.




*Selling,
      General and Administrative Expense*




Selling,
      general and administrative expenses increased $3,046,419 to $8,246,812 in fiscal
      2008 from $5,200,393 in fiscal 2007. The increase is due to an increase in
      the
      number of employees and an increase in the selling and marketing expenses as
      we
      worked to expand our customer base. Also, $1,656,839 was charged to expense
      in
      fiscal 2008 for the value of stock options granted to employees.




*Non-Operating
      Income and Expenses*




Net
      interest expense decreased to $168,607 in fiscal 2008 from approximately
      $400,000 in fiscal 2007. The decrease is due to a lower level of notes payable
      during the year.




*Net
      Income/Loss*




Our
      net
      loss in fiscal 2008 increased to $8,960,486 from $6,168,447 in fiscal 2007,
      an
      increase of $2,792,039. The increase is a result of the costs associated with
      the increase in personnel and the increased costs attributable to the new
      products being developed. Additionally, as noted above, costs of $1,656,839
      attributable to the issuance of stock options substantially increased the
      interest charged to expense for the current fiscal year.




**Fiscal
      2007 compared to Fiscal 2006**




*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.




*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.




*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.




*Selling,
      General and Administrative Expense*




Selling,
      general and administrative expenses 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.




23




*Non-Operating
      Income and Expenses*




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.




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.




*Net
      Income/ Loss*




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. Net operating revenues and gross profit were
      $1.6 million and $.5 million, respectively, in fiscal 2007, and $1.8 million
      and
      $.7 million, respectively, in fiscal 2006.




**Liquidity
      and Capital Resources**




At
      February 29, 2008, we had cash of approximately $0.50 million, compared to
      approximately $1.05 million at February 28, 2007. At February 29, 2008 we had
      working capital of approximately $50,000 as compared to approximately $800,000
      at the end of the prior fiscal year. At February 29, 2008, we had accounts
      receivable, net of allowance for doubtful accounts, of approximately $800,000
      compared to approximately $250,000 at February 28, 2007.This increase is a
      result of the increased level of sales in the 2008 fiscal year. In fiscal 2008
      we acquired property and equipment at a cost of approximately $170,000. As
      of
      May 15, 2008, we had less than $100,000 in cash.




We
      acquired property and equipment at a cost of approximately $63,000 in fiscal
      2007. At February 29, 2008, we had no material capital project that would
      require funding. Subsequent to year end we agreed to acquire a service facility
      in Conley, Georgia, for $1,050,000.Subsequent to year end, we also entered
      into
      a lease for a new facility in El Segundo, California, of approximately the
      same
      size as our current facility, which we expect to be adequate for our current
      needs. If our sales continue to increase as we anticipate, we will need to
      further expand our facilities to meet required production levels. In fiscal
      2008
      we made payments on notes payable of approximately $450,000 compared to debt
      repayments of $0.1 million in fiscal 2007. In fiscal 2008 we incurred additional
      debt obligations of $704,000 in the form of 7% convertible debentures. These
      debentures carry a term of five years and are convertible into shares of our
      common stock at a price of $3.00 per share. If the closing price of our stock
      exceeds two times the conversion price ($6) for fifteen consecutive trading
      days, the debenture will automatically be converted into shares of our common
      stock. If an event of default occurs, which includes, but is not limited to,
      the
      failure to pay interest or principal when due, or the filing of bankruptcy,
      the
      holder may declare the entire outstanding principal balance and all accrued
      but
      unpaid interest, immediately due and payable. Interest is required to be paid
      quarterly, beginning May 31, 2008. Additionally, in the 2008 fiscal year,
      $183,533 of secured notes payable was converted into 183,533 shares of our
      common stock. 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 secured notes, no payments were required for the first twelve
      months, and all interest accrued during this period was added to the balance
      of
      the notes.




During
      fiscal 2008 we issued 6,891,791 shares of common stock for net proceeds of
      $6,433,089. We also issued 183,533 shares of common stock in satisfaction of
      $183,533 of secured notes payable, and issued 2,012,577 shares of common stock
      as penalty shares for failure to file a registration statement for previously
      issued shares.


Subsequent
        to year end, the Board of Directors offered to modify the terms of the warrants
        to purchase our common stock that were issued in January 2006 as part of
        our
        Chapter 11 bankruptcy plan of reorganization. Under the modification, the
        holders of these warrants could elect to either (i) exercise the warrants
        at a
        price of $1.00 per share, or (ii) change the exercise price from $4.00 to
        $2.00
        per share and shorten the expiration date from January 31, 2011 to January
        31,
        2009, or (iii) continue to hold the warrants with no modification of their
        terms. As a result of the offer to modify the warrants, 1,197,103 shares
        were
        exercised through May 2008 resulting in cash proceeds of $1,197,103.
        Additionally, 430,329 warrants held by the secured note holder were exercised
        in
        lieu of note payments, leaving 2,667,739 of the bankruptcy warrants outstanding.




24




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. 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 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.




*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.




25




*Series
      A Preferred Stockholders* –
The
      holders of the Series A Preferred Stock, of which 591,110 shares were
      outstanding immediately prior to the Effective Date, received a total of 357,818
      shares of Common Stock and warrants to purchase 89,455 shares of Common Stock
      in
      exchange for their Series A Preferred Stock.





*Series
      B Preferred Stockholders* –
The
      holders of $9,979,838 of Series B Preferred Stock which was fully paid for
      immediately prior to the Effective Date, received a total of 3,215,712 shares
      of
      Common Stock and warrants to purchase 987,195 shares of Common Stock in exchange
      for their Series B Preferred Stock. The remaining, unpaid shares of Series
      B
      Preferred Stock were cancelled on the Effective Date.





*Common
      Stockholders* –
The
      holders of the 439,458,082 shares of Common Stock outstanding immediately prior
      to the Effective Date (“Old Common Stock”) received approximately 1.3 million
      shares of new Common Stock in the reorganized Company on the Effective Date
      in
      exchange for the Old Common Stock (i.e. one share of new Common Stock in
      exchange for each 338 shares of Old Common Stock).





*Aries
      Group Reorganization Fee* -
      For
      major contributions to the Plan, Disclosure Statement which describes the Plan,
      business analysis and modeling, feasibility study, assistance in settlement
      disputes between the Company and certain creditors, and providing valuation
      analysis for pricing of the investment by the New Money Investors as well as
      the
      conversion rates for the DIP Lenders, the Aries Group received 2,541,500 shares
      of the Company’s Common Stock and warrants to purchase 508,300 shares of Common
      Stock. The Plan provided that of these 2,541,500 shares of Common Stock and
      508,300 warrants received by the Aries Group, 900,000 shares of Common Stock
      and
      179,800 Warrants were to be delivered to Harry Kurtzman.




*New
      Warrants*– The
      warrants to purchase a total of approximately 3,807,319 shares of Common Stock
      issued under the Plan to the New Money Investors, the DIP Lenders, holders
      of
      unsecured claims, holders of Series A and Series B Preferred Stock and the
      Aries
      Group entitled the warrant holder to purchase Common Stock at a price of $3.00
      per share during the first 12 months following the Effective Date, $3.50 per
      share during the second 12 months following the Effective Date, and $4.00 per
      share thereafter. The warrants to purchase a total of 259,900 shares of Common
      Stock issued under the Plan to the holders of the Secured Notes entitled the
      warrant holder to purchase Common Stock at a price of $2.00 per share during
      the
      first 12 months following the Effective Date, $2.50 per share during the second
      12 months following the Effective Date, and $3.00 per share thereafter. The
      Plan
      also provided for the reservation by the Company of warrants for 500,000 shares
      for the Company’s management and 500,000 shares for 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 29, 2008:




**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)
            
            $
            3,223,998
            
            $
            1,334,221
            
            $
            1,185,777
            
            $
            0
            
            $
            704,000Capital
                lease obligations
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Operating
                leases (b)
            
            $
            1,681,140
            
            $
            280,190
            
            $
            672,456
            
            $
            672,456
            
            $
            56,038Minimum
                license commitment
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Fixed
                asset and inventory purchase commitments
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Total
                contractual cash obligations
            
            $
            4,853,935
            
            $
            1,527,677
            
            $
            1,893,764
            
            $
            672,456
            
            $
            760,038


(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. Also includes $704,000 of five year, 7% convertible debentures,
                convertible into our common stock at a price of $3.00 per share.
                For
                additional information regarding the terms of these Notes, see the
                discussion appearing above in “Liquidity and Capital
                Resources.”


(b)
            Represents
                obligations for the lease of our new facilities which begins May
                1,
                2008.




26




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




We
      are
      exposed to various market risks, including changes in interest rates. Market
      risk is the potential loss arising from adverse changes in market rates and
      prices. We consider our exposure to market risks to be immaterial. Historically,
      we have not entered into derivative financial instrument transactions to manage
      or reduce market risk or for speculative purposes. Our long term debt
      obligations all bear interest at fixed rates and, therefore, have no exposure
      to
      interest rate fluctuations. Our risk related to foreign currency fluctuations
      is
      not material at this time, as any accounts we have in foreign denominations
      are
      not in themselves material.





As
      we
      anticipate needing to use the cash we held at year end within a short period,
      we
      have invested it in money market accounts, and we do not expect that the amount
      of fluctuation in interest rates will expose us to any significant risk due
      to
      market fluctuation.




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**




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




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




Not
      applicable.




**ITEM
      9A(T). 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 29, 2008, that they
      were effective




**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 29, 2008, that have materially affected or are
      reasonably likely to materially affect our internal control over financial
      reporting.





**ITEM
      9B. OTHER INFORMATION**




During
      the three months ended February 29, 2008, we sold 531,858 shares of our common
      stock to private investors for proceeds of $519,267. In January, 2008, we sold
      $704,000 of 7% convertible debentures to private investors. The debentures
      are
      convertible into our common stock at the option of the holder at a price of
      $3
      per share, and are for a term of five years. If the closing price of our stock
      exceeds two times the conversion price ($6) for fifteen consecutive trading
      days, the debenture will automatically be converted into shares of our common
      stock. For additional information regarding the debentures see Managements
      Discussion and Analysis. 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.




27




**PART
      III**




**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE 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
              
              65
              
              Chairman,
                  Director, Chief Executive Officer, Chief Financial Officer and
                  PresidentArthur
                  J. Schwartz, PhD
              
              60
              
              Director,
                  Chief Technical OfficerDr.
                  Maurice Zeitlin
              
              66
              
              Director,
                  Chairman - Nominating Committee; member, Compensation Committee
                  and Audit
                  CommitteeWarren
                  Breslow
              
              65
              
              Director,
                  Chairman - Audit Committee; member, Nominating Committee and Compensation
                  CommitteeSalvador
                  Diaz-Verson, Jr.
              
              53
              
              Director,
                  Chairman, Compensation Committee; member, Audit Committee and Nominating
                  Committee**Other
                  Executive Officers**Yedidia
                  Cohen
              
              52
              
              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.




28




**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.




**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. During the year ended February
      28,
      2007, Warren Breslow, a director, acquired 384,615 shares of common stock for
      which he failed to file a Form 4. During the year ended February 28, 2008,
      the
      following directors failed to file a Form 4 for their acquisitions of stock:
      Melvin Gagerman – 137,362 shares, Dr. Arthur Schwartz – 14,285 shares;
      Dr. Maurice Zeitlin – 96,702 shares; Warren Breslow – 549,450 shares.




*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.




29





*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.




**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.




30






*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.




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.




Dr.
      Arthur J. Schwartz, a director, was a consultant to the Company from March
      1,
      2006, until November 30, 2006, at which time he was appointed Chief Technical
      Officer. Dr. Schwartz receives an annual base salary of. $180,000.




**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,
      which has not yet been paid. The Compensation Committee has determined that
      the
      performance goals were not sufficiently met and therefore no bonus will be
      paid
      for the current fiscal 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.


31




*2006
      Stock Option Plan*




** In
      September 2006 our Board of Directors adopted an employee stock option plan,
      which is subject to shareholder approval. The option plan authorizes the Board
      of Directors or a committee of directors designated by the Board (the “Option
      Committee”) to grant 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.




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
      of the Plan. 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 of the Plan.




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.




In
      fiscal
      2008 Dr. Schwartz and Yedidia Cohen were each granted 150,000 options,
      exercisable at $2.00 per share, with a term of five years. The option grants
      are
      subject to shareholder approval of the Stock Option Plan.




**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 currently being the only executive officer to participate. We do not
      presently maintain any other deferred compensation or retirement
      plans.


32





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.





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
      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” for the fiscal year ended February 29,
      2008. 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 the Company’s Annual Report on Form 10-K for
      the fiscal year ended February 29, 2008.


33





**The
      Compensation Committee:**




**Warren
      Breslow**




**Dr.
      Maurice Zeitlin**




**Salvatore
      Diaz-Verson**




**The
      following table summarizes all compensation earned for the fiscal years ended
      February 29, 2008, and February 28, 2007, to the individual who served as our
      chief executive officer during fiscal 2008, and the two other most highly
      compensated executive officers who were serving in such capacity as of February
      29, 2008 (the "named executive officers").**




**2008
      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)
            
            
            2008
            
            
            360,000
            
            
            -
            
            
            -
            
            
            50,326
            (5)
            
            410,326Chief
                Executive Officer,
              Chief
                Financial Officer, and President
            
            
            2007
            
            
            319,154
            (2)
            
            171,359
            
            
            100,000
            (4)
            
            19,320
            (5)
            
            609,833Arthur
                J. Schwartz
            
            
            2008
            
            
            180,000
            
            
            34,512
            
            
            -
            
            
            2,229
            (6)
            
            216,741Chief
                Technical Officer
            
            
            2007
            
            
            42,231
            (7)
            
            -
            
            
            -
            
            
            -
            
            
            42,231Yedidia
                Cohen
            
            
            2008
            
            
            177,116
            
            
            31,460
            
            
            -
            
            
            1,898
            (6)
            
            210,474Vice
                President of Engineering
            
            
            2007
            
            
            164,285
            
            
            -
            
            
            -
            
            
            808
            (6)
            
            165,093


(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 the
                applicable fiscal year in accordance with FAS 123R, 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.


(7)
            Dr..
                Schwartz, a director and executive officer, was a consultant to the
                Company from March 1, 2006, until November 30, 2006, at which time
                he was
                appointed Chief Technical Officer. Salary for fiscal 2007 only includes
                amounts paid as Chief Technical Officer effective December 1,
                2006.





No
      bonuses or stock awards were granted to the above individuals for the 2007
      or
      2008 fiscal years.




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




The
      following table sets forth certain information at February 29, 2008, and for
      the
      year then ended, with respect to plan-based awards granted to the individuals
      named in the Summary Compensation Table above.


34





**2008
      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
            
            
            12/16/07
            
            
            12/16/07
            
            
            
            
            
            
            
            
            
            
            
            100,000
            (2)
            $
            2.00
            (2)
            $
            121,023n/a
            
            
            n/a
            
            
            
            (3)
            $
            100,000
            
            $
            200,000
            
            
            -
            
            
            -
            
            
            -Arthur
                J. Schwartz
            
            
            03/01/07
            
            
            03/01/07
            
            
            -
            
            
            -
            
            
            -
            
            
            150,000
            
            $
            2.00
            (2)
            $
            172,558Yedidia
                Cohen
            
            
            03/01/07
            
            
            03/01/07
            
            
            -
            
            
            -
            
            
            -
            
            
            150,000
            
            $
            2.00
            (6)
            $
            172,558





(1)
            Reflects
                the full grant date fair market value, computed in accordance with
                FAS
                123R, assuming no forfeitures.****


(2)
            Options
                vest on the date of grant and are exercisable at a price of $2.00
                per
                share, with a term of five years. This grant is made under the Plan,
                which
                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 was previously
                reflected in the Summary Compensation Table for fiscal 2007, but
                has not
                yet been paid. He remains eligible for bonuses in future fiscal years.
                The
                compensation committee has determined that due to the Company’s financial
                position, no bonuses will be paid for the current year.


(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. The approval date reflects the
                date the
                Compensation Committee formally approved the stock option
                grant.


(6)
            Options
                vest over a three year period from the date of grant and are exercisable
                at a price of $2.00 per share, with a term of five years. This grant
                is
                made under the Plan, which is subject to shareholder
                approval.





**Outstanding
      Equity Awards at 2008 Fiscal Year-End**





The
      following table summarizes certain information regarding the number and value
      of
      all options to purchase our common stock held by the individuals named in the
      Summary Compensation Table at February 29, 2008. No stock awards or equity
      incentive plan awards were issued or outstanding during fiscal
      2008.


35




**2008
        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**
              **Date****Name**
            
            **Exercisable**
            
            **Un-exercisable**Melvin
                Gagerman (a)(b)
            
            
            250,000
            (b)
            
            0
            (b)
            
            —
            
            $
            2.50
            (a)
            
            1/31/09
            (a)Melvin
                Gagerman (c)(d)
            
            
            350,000
            (d)
            
            0
            (d)
            
            
            
            $
            2.50
            (c)
            
            1/31/09
            (a)Melvin
                Gagerman (e)
            
            
            300,000
            (e)
            
            0
            (e)
            
            
            
            $
            2.00
            
            
            [11/1/11
            ]Melvin
                Gagerman (f)
            
            
            100,000
            
            
            0
            
            
            
            
            $
            2.00
            
            
            12/17/12Arthur
                J. Schwartz(f)
            
            
            150,000
            
            
            0
            
            
            -
            
            $
            2.00
            
            
            03/01/12Yedidia
                Cohen(f)
            
            
            150,000
            
            
            —
            
            
            —
            
            $
            2.00
            
            
            03/01/12





(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, subject to shareholder approval of the
                Plan, the exercise price will be $2.00 per share. The exercise price
                in
                the table does not reflect shareholder approval. In fiscal 2008 the
                term
                of these options was extended from three years to five years, subject
                to
                shareholder approval. The term of the options in the table does not
                give
                effect to shareholder approval of the
                Plan.


(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, subject
                to shareholder approval of the Plan, the warrants were fully vested
                as of
                May 1, 2006. The vesting information in the table does not give effect
                to
                shareholder approval of the Plan.


(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 give effect to shareholder approval of the Plan.
                In
                fiscal 2008 the term of these options was extended from three years
                to
                five years, subject to shareholder approval of the
                Plan.


(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). The Warrants were fully vested as
                of
                February 29, 2008.


(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. In fiscal 2008 the
                term of
                these options was extended from three years to five years. This grant
                is
                subject to shareholder approval of the
                Plan.


(f)
            This
                grant is subject to approval of the
                Plan.





**Option
      Exercises and Stock Vesting During 2008**





No
      stock
      options were exercised during fiscal 2008 by the individuals named in the
      Summary Compensation Table. No stock awards were issued or outstanding during
      fiscal 2008.




36




**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 an option term of three years, which 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 and are subject
      to shareholder approval of the Plan. In addition to the 300,000 options granted
      under the Gagerman Agreement, Mr. Gagerman has been granted an additional
      700,000 options and warrants, described elsewhere in this Report, and remains
      eligible for future equity compensation awards.





*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.





*Medical
      Benefits*




In
      addition to health and dental insurance generally available to all of our
      employees, Mr. 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 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).




37




·
            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.





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. All of
      these options were fully vested as of November 2007, subject to shareholder
      approval of the Plan.





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”;






38




·
            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 29, 2008, 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 29, 2008. 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 29,
      2008.




**Director
      Compensation During Fiscal 2008**





The
      following table summarizes all compensation paid to directors other than named
      executive officers during fiscal 2008.





**2008
      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**
              **($)**Maurice
                Zeitlin (3)
            
            
            -
            
            
            -
            
            
            13,553
            
            
            -
            
            
            -
            
            
            13,553Warren
                Breslow (4)
            
            
            -
            
            
            -
            
            
            13,553
            
            
            -
            
            
            -
            
            
            13,553Salvador
                Diaz-Verson, Jr. (5)
            
            
            -
            
            
            -
            
            
            13,553
            
            
            -
            
            
            -
            
            
            13,553






(1)
            Reflects
                the amount recognized for financial statement reporting purposes
                for
                fiscal year 2008 in accordance with FAS 123(R), assuming no
                forfeitures.


(2)
            In
                fiscal 2008 Messrs. Zeitlin, Breslow and Diaz-Verson 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 not
                less than
                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 October
                2012.
                The fair market value of each of these options at the time of grant,
                computed in accordance with FAS 123(R), was $13,553.


(3)
            The
                director had 50,000 options outstanding as of February 29,
                2008.


(4)
            The
                director had 50,000 options outstanding as of February 29,
                2008.


(5)
            The
                director had 25,000 options outstanding as of February 29, 2008.





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 2008 fiscal year our Compensation Committee was comprised of Messrs.
      Breslow, Diaz-Verson, Jr., Zeitlin and (until his resignation in June 2007)
      Sheldon Appel. None of the members of the Compensation Committee was an
      executive officer or employee of the Company. During the 2008 fiscal year,
      none
      of our executive officers served on our Compensation Committee.




39




**SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




The
      following table sets forth, to the extent of our knowledge, certain information
      regarding our common stock owned as of May 1, 2008 (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))**Melvin
                  Gagerman (2)
              
              
              611,501
              
              
              1.6
              %Arthur
                  Schwartz (3)
              
              
              728,659
              
              
              1.9
              %Maurice
                  Zeitlin (4)
              
              
              1,116,260
              
              
              2.8
              %Warren
                  Breslow (5)
              
              
              1,488,378
              
              
              3.8
              %Salvador
                  Diaz-Verson, Jr. (6)
              
              
              115,934
              
              
              *Yedidia
                  Cohen (7)
              
              
              57,962
              
              
              *All
                  current executive officers and Directors as a group (six)
              
              
              4,118,694
              
              
              10.5
              %




*
      Less
      than 1% of outstanding shares.




(1)
            Beneficial
                ownership is determined in accordance with rules of the U.S. Securities
                and Exchange Commission. The calculation of the percentage of beneficial
                ownership is based upon 39,228,226 shares of common stock outstanding
                on
                May 15, 2008. 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 May 1, 2008, 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)
            Includes
                446,639 warrants and options exercisable within 60 days of May 1,
                2008.


(3)
            Includes
                157,433 warrants and options exercisable within 60 days of May 1,
                2008.


(4)
            Includes
                157,757 warrants and options exercisable within 60 days of May 1,
                2008. (5)
            Includes 279,313 warrants and options exercisable
              within
              60 days of May 1, 2008.


(6)
            Includes
                60,989 warrants and options exercisable within 60 days of May 1,
                2008.


(7)
            Includes
                51,327 warrants and options exercisable within 60 days of May 1,
                2008.




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





**Securities
      Authorized for Issuance Under Equity Compensation Plans**  **as
      of February 29, 2008**




**Equity
      Compensation Plan Information as of February 29, 2008**


**Plan
                  Category**
              
              **Number of Securities****to**
                **be Issued Upon****Exercise**
                **of Outstanding Options,**
                **Warrants and Rights**
                **(a)**
              
              **Weighted-average**
                **Exercise
                  Price of**
                **Outstanding**
                **Options, Warrants and Rights**
                **(b)**
              
              **Number of Securities****Remaining Available for**
                **Future Issuance Under Equity**
                **Compensation Plans**
                **(Excluding Securities Reflected in Column (a))**
                **(c)**Equity
                  compensation plans approved by security holders (1)
              
              
              802,778
              
              $
              2.15
              
              
              197,222Equity
                  compensation plans not approved by security holders (2)
              
              
              1,491,500
              
              
              2.26
              
              
              1,508,500





(1)
            Reflects
                warrants for management and directors 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. 250,000 Management Warrants and 350,000
                Director Warrants were issued to Melvin Gagerman under the 2006 Chapter
                11
                Bankruptcy Plan. The numbers in this table are as of February 29,
                2008,
                and do not give effect to the approval of the 2006 Stock Option Plan.
                If
                the 2006 Stock Option Plan is approved at a Meeting of Shareholders,
                the
                600,000 Warrants previously issued to Mr. Gagerman will be automatically
                converted to options under the 2006 Stock Option Plan. Therefore,
                upon
                shareholder approval of the 2006 Stock Option Plan, 202,778 Warrants
                will
                remain outstanding with an average exercise price of $2.50, and 797,222
                will remain available for future grants. For additional information
                regarding the terms of Director Warrants and Management Warrants
                see “2008
                Outstanding Equity Awards at Fiscal Year End”, including the notes
                thereto, in the “Executive Compensation” section elsewhere in this
                Report


(2)
            The
                only equity compensation plan which has not yet been approved by
                shareholders is the 2006 Stock Option Plan. Information regarding
                thisPlan is contained elsewhere in this
                Report.




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




*Related
      Transactions*




Since
      the
      beginning of the 2008 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 February 29, 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 and officer, has made various temporary advances to the
      Company totaling $175,000 during fiscal 2008. The highest amount outstanding
      at
      any one time was $100,000, and as of February 29, 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.




*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.




40




*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, 2008 and 2007:





**Year
                Ended February 28,****2008**
            
            **2007**Audit
                Fees(1)
            
            $
            110,500
            
            $
            82,500Audit-related
                fees(2)
            
            
            -
            
            
            -Tax
                fees(3)
            
            
            -
            
            
            -All
                other fees(4)
            
            
            -
            
            
            -Total
            
            $
            110,500
            
            $
            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,
                2008 and 2007.(2)
            Includes
                fees for professional services rendered in connection with our evaluation
                of internal controls.





**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 2007
      and
      2008 all services provided by Kabani and Company were pre-approved by the Audit
      Committee in accordance with this policy.




41




**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


42




**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)10.18
              Form
                  of 7% Convertible Subordinated Debenture10.19
              Asset
                  Purchase Agreement by and among Aura Systems, Inc. and Emerald
                  Commercial
                  Leasing, Inc.10.20
              Mutual
                  Agreement Ending AuraGen Distributorship Exclusivity between Emerald
                  Commercial Leasing, Inc. and Aura Systems Inc.10.21
              Employment
                  Agreement Dated May 15, 2008, by and between Joseph Dickman and
                  the
                  Company.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.




43




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:
                  June 13, 2008By:
              /s/
                  Melvin GagermanMelvin
                  GagermanChief
                  Executive Officer




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


Signatures
              Title
              Date/s/
                  Melvin Gagerman
                  Melvin
                    Gagerman
              Chief
                  Executive Officer, Acting Chief Financial Officer Director and
                  Chairman of
                  the Board (Principal Executive Officer, Principal Financial Officer,
                  Principal Accounting Officer)
              June
                  13, 2008/s/
                  Arthur Schwartz
              Director
              June
                  13, 2008Arthur
                  SchwartzDirector
              June
                  13, 2008/s/
                  Maurice ZeitlinMaurice
                  ZeitlinDirector
              June
                  13, 2008/s/
                  Warren BreslowWarren
                  BreslowDirector
              June
                  13 , 2008/s/Salvador
                  Diaz-Verson, Jr.Salvador
                  Diaz-Verson, Jr.Director
              June
                  13, 2008






44






**Index
        to Consolidated Financial Statements**
  Report
                  of Independent Registered Public Accounting Firm
              F-1Consolidated
                  Financial Statements of Aura Systems, Inc. and
                  Subsidiaries:Consolidated
                  Balance Sheets - February 29, 2008 and February 28, 2007
              F-2Consolidated
                  Statements of Operations - Years ended February 29, 2008, February
                  28,
                  2007 and February 28, 2006
              F-3Consolidated
                  Statements of Stockholders' Equity (Deficit) - Years ended February
                  29,
                  2008, February 28, 2007 and February 28, 2006
              F-4Consolidated
                  Statements of Cash Flows - Years ended February 29, 2008, February
                  28,
                  2007 and February 28, 2006
              F-5
                  to F-6Notes
                  to Consolidated Financial Statements
              F-7
                  to F-21Consolidated
                  Financial Statement Schedule II: Valuation and Qualifying
                  Accounts
              F-22
  Schedules
        other than those listed above are omitted because they are not required or
        are
        not applicable, or the required information is shown in the respective
        consolidated financial statements or notes thereto.
  
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To
        the
        Board of Directors and Stockholders
  Aura
        Systems, Inc. and subsidiaries
  We
        have
        audited the accompanying consolidated balance sheets of Aura Systems, Inc.
        (a
        Delaware corporation) and subsidiaries as of February 29, 2008 and February
        28,
        2007, and the related consolidated statements of operations, stockholders'
        equity (deficit), and cash flows for each of the three years in the period
        ended
        February 29, 2008. These financial statements are the responsibility of the
        Company's management. Our responsibility is to express an opinion on these
        financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Aura Systems, Inc. and
        subsidiaries as of February 29, 2008 and February 28, 2007, and the results
        of
        their operations and their cash flows for each of the three years in the
        period
        ended February 29, 2008 in conformity with accounting principles generally
        accepted in the United States of America.
  The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern.  During the years ended
        February 29, 2008 and February 28, 2007, the Company incurred losses of
        $8,960,486 and $6,168,447, respectively and had negative cash flows from
        operating activities of $7,334,594 and $3,233,516, respectively during the
        years
        ended February 29, 2008 and February 28, 2007. The Company had an accumulated
        deficit of $354,121,403 as of February 29, 2008. These factors, among others,
        as
        discussed in Note 10 to the consolidated financial statements, raise substantial
        doubt about the Company’s ability to continue as a going concern. Management’s
        plans in regard to these matters are also described in Note 10. The consolidated
        financial statements do not include any adjustments that might result from
        the
        outcome of this uncertainty.
  /s/
        Kabani & Company, Inc.
 **Certified
        Public Accountants**
 
 Los
        Angeles, California
 May
        21 ,
        2008
  F-1
  **AURA
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
  **February
                  29, 2008**
              
              **February
                  28, 2007****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              37,532
              
              $
              1,051,259Accounts
                  receivable, net of allowance for doubtful accounts of $99,300 and
                  $164,241
              
              
              787,054
              
              
              249,984Current
                  inventories
              
              
              1,500,000
              
              
              750,000Other
                  current assets
              
              
              266,184
              
              
              243,854Total
                  current assets
              
              
              2,590,770
              
              
              2,295,097Property,
                  plant, and equipment, net
              
              
              193,905
              
              
              58,517Non-current
                  inventories net of allowance for obsolete inventories of $2,724,399
                  and
                  $3,268,374
              
              
              2,473,952
              
              
              3,195,523Total
                  assets
              
              $
              5,258,627
              
              $
              5,549,137**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              708,359
              
              $
              216,225Current
                  portion of notes payable
              
              
              824,358
              
              
              611,411Notes
                  payable- related party
              
              
              509,863
              
              
              -Accrued
                  expenses
              
              
              529,876
              
              
              470,092Deferred
                  income
              
              
              -
              
              
              164,625Total
                  current liabilities
              
              
              2,542,456
              
              
              1,462,353Notes
                  payable, net of current portion
              
              
              1,889,777
              
              
              1,983,118Total
                  liabilities
              
              
              4,462,233
              
              
              3,445,471Commitments
                  and contingenciesStockholders'
                  equity :Common
                  stock, $0.0001par value, 50,000,000 shares authorized, 37,783,539
                  and
                  28,695,638 issued and outstanding at February 29, 2008 and February
                  28,
                  2007
              
              
              3,778
              
              
              2,870Additional
                  paid-in capital
              
              
              355,618,690
              
              
              347,261,713Subscription
                  receivable
              
              
              (704,671
              )
              
              -Accumulated
                  deficit
              
              
              (354,121,403
              )
              
              (345,160,917
              )Total
                  stockholders' equity
              
              
              796,394
              
              
              2,103,666Total
                  liabilities and stockholders' equity
              
              $
              5,258,627
              
              $
              5,549,137
 **The
          accompanying notes are an integral part of these financial
          statements**
 F-2
  **AURA
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **For
        the Years Ended February 29, 2008, February 28, 2007, and February 28,
        2006**
  2008
              
              2007
              
              2006Net
                  revenues
              
              $
              2,849,331
              
              $
              1,624,074
              
              $
              1,756,105Cost
                  of goods sold
              
              
              1,746,361
              
              
              745,060
              
              
              614,327Inventory
                  write down
              
              
              52,675
              
              
              419,765
              
              
              439,188Gross
                  profit
              
              
              1,050,295
              
              
              459,249
              
              
              702,590Operating
                  expensesEngineering,
                  research and development
              
              
              1,541,617
              
              
              1,048,529
              
              
              1,483,247Selling,
                  general, and administrative
              
              
              8,246,812
              
              
              5,200,393
              
              
              5,867,388Legal
                  settlements
              
              
              -
              
              
              -
              
              
              267,726Total
                  operating expenses
              
              
              9,788,429
              
              
              6,248,922
              
              
              7,618,361Loss
                  from operations
              
              
              (8,738,134
              )
              
              (5,789,673
              )
              
              (6,915,771
              )Other
                  income (expense):Gain
                  on disposition of assets
              
              
              1,500
              
              
              7,750
              
              
              2,446,798Interest
                  expense, net
              
              
              (168,607
              )
              
              (392,977
              )
              
              (6,602,020
              )Loss
                  on settlement of debt
              
              
              (84,425
              )
              
              -
              
              
              -Other
                  income (expense), net
              
              
              28,640
              
              
              6,453
              
              
              (50,000
              )Change
                  in derivative liability
              
              
              -
              
              
              -
              
              
              16,254,502Bankruptcy
                  settlements
              
              
              -
              
              
              -
              
              
              1,730,979Total
                  other income (expense)
              
              
              (222,352
              )
              
              (378,774
              )
              
              13,780,259Net
                  Income (Loss)
              
              $
              (8,960,486
              )
              $
              (6,168,447
              )
              $
              6,864,488Basic
                  and diluted loss per share
              
              $
              (0.28
              )
              $
              (0.25
              )
              $
              2.24*Weighted-average
                  shares outstanding
              
              
              32,252,902
              
              
              25,114,154
              
              
              3,063,216
  *
              Basic
                  and diluted weighted average no. of shares outstanding are equivalent
                  because the effect ofdilutive
                  securities is anti-dilutive
  **The
        accompanying notes are an integral part of these financial
        statements**
  F-3
 **AURA
        SYSTEMS, INC. AND SUBSIDIARIES**
 **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
              
              Subscription
                  Receivable
              
              Accumulated
                Deficit
              
              Total
                  Stockholders' Equity (Deficit)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
              )
              $
              2,103,666Common
                  stock issued in private placements, net
              
              
              -
              
              
              -
              
              
              6,891,791
              
              
              689
              
              
              -
              
              
              6,432,400
              
              
              (704,671
              )
              
              -
              
              
              5,728,418Stock
                  issued for settlement of secured debt
              
              
              -
              
              
              -
              
              
              183,533
              
              
              18
              
              
              -
              
              
              267,939
              
              
              
              
              
              -
              
              
              267,957Penalty
                  shares issued
              
              
              -
              
              
              -
              
              
              2,012,577
              
              
              201
              
              
              -
              
              
              (201
              )
              
              
              
              
              -
              
              
              -Employee
                  options expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,656,838
              
              
              
              
              
              -
              
              
              1,656,838Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              (8,960,486
              )
              
              (8,960,486
              )Balance,
                  February 29, 2008
              
              
              -
              
              
              -
              
              
              37,783,539
              
              $
              3,778
              
              
              -
              
              $
              355,618,690
              
              
              (704,671
              )
              $
              (354,121,403
              )
              $
              796,394
  **The
        accompanying notes are an integral part of these financial
        statements**
  F-4
  **AURA
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **For
        the Years Ended February 29, 2008, February 28, 2007 and February 28,
        2006**
 2008
                
                2007
                
                2006Cash
                    flows from operating activities:Net
                    income (loss)
                
                $
                (8,960,486
                )
                $
                (6,168,447
                )
                $
                6,864,488Adjustments
                    to reconcile net loss to net cash used in operating
                    activitiesDepreciation
                    and amortization
                
                
                35,462
                
                
                30,948
                
                
                65,091Gain
                    on disposition of assets
                
                
                (1,500
                )
                
                (7,750
                )
                
                (2,446,798
                )Bad
                    debt expense
                
                
                -
                
                
                2,646
                
                
                88,682Change
                    in reserve for inventory obsolescence
                
                
                52,675
                
                
                419,765
                
                
                439,188Gain
                    on extinguishment of debt
                
                
                -
                
                
                -
                
                
                (1,730,979
                )Change
                    in derivative liability
                
                
                -
                
                
                -
                
                
                (16,254,502
                )Beneficial
                    conversion feature on convertible debt
                
                
                -
                
                
                -
                
                
                3,801,457Operating
                    expense charged for warrants issued
                
                
                -
                
                
                223,974
                
                
                943,396Operating
                    expense charged for employee stock options issued
                
                
                1,656,838
                
                
                -
                
                
                -Loss
                    on debt settlement
                
                
                84,425
                
                
                -
                
                
                -Operating
                    expenses satisfied with note payable
                
                
                -
                
                
                167,346
                
                
                -Operating
                    expenses satisfied with stock
                
                
                -
                
                
                -
                
                
                300,000(Increase)
                    decrease in:Accounts
                    receivable
                
                
                (537,070
                )
                
                (164,822
                )
                
                460,946Inventories
                
                
                (81,104
                )
                
                214,576
                
                
                302,760Other
                    current assets
                
                
                (22,330
                )
                
                2,480,700
                
                
                626,467Increase
                    (decrease) in:Accounts
                    payable and accrued expenses
                
                
                603,121
                
                
                (432,452
                )
                
                1,974,022Deferred
                    income
                
                
                (164,625
                )
                
                -
                
                
                -Net
                    cash used in operating activities
                
                
                (7,334,594
                )
                
                (3,233,516
                )
                
                (4,565,782
                )Cash
                    flows from investing activities:Purchase
                    of property, plant, and equipment
                
                
                (170,850
                )
                
                (62,796
                )
                
                -Proceeds
                    from disposal of property, plant, and equipment
                
                
                1,500
                
                
                7,750
                
                
                -Net
                    cash used in investing activities
                
                
                (169,350
                )
                
                (55,046
                )
                
                -
  F-5
  **AURA
        SYSTEMS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  2008
              
              2007
              
              2006Cash
                  flows from financing activities:Proceeds
                  from notes payable
              
              
              704,000
              
              
              -
              
              
              -Proceeds
                  from related party loans payables
              
              
              500,000
              
              
              --
              
              
              -Payments
                  on notes payable
              
              
              (442,201
              )
              
              (97,817
              )
              
              (103,727
              )Net
                  proceeds from issuance of preferred stock
              
              
              -
              
              
              -
              
              
              123,461Net
                  proceeds from issuance of common stock
              
              
              5,728,418
              
              
              3,965,156
              
              
              4,957,154Net
                  cash provided by financing activities
              
              
              6,490,217
              
              
              3,867,339
              
              
              4,976,888Net
                  increase (decrease) in cash and cash equivalents
              
              
              (1,013,727
              )
              
              578,777
              
              
              411,106Cash
                  and cash equivalents, beginning of year
              
              
              1,051,259
              
              
              472,482
              
              
              61,376Cash
                  and cash equivalents, end of year
              
              $
              37,532
              
              $
              1,051,259
              
              $
              472,482Supplemental
                  disclosures of cash flow information:Interest
                  paid
              
              $
              132,375
              
              $
              46,045
              
              $
              550,255Income
                  taxes paid
              
              $
              -
              
              $
              -
              
              $
              -
  Supplemental
        schedule of non-cash financing and investing activities:
  During
        the year ended February 29, 2008, $183,533 of notes payable was converted
        into
        183,533 shares of common stock.
  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
  **The
        accompanying notes are an integral part of these financial
        statements**
  F-6
  **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 Chapter 11 proceedings 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 collectability is reasonably assured. Payments received before all of
        the
        relevant criteria for revenue recognition are satisfied are recorded as unearned
        revenue.
  F-7
  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 29, 2008 and
        February 28, 2007, $2,473,952, and $3,195,523, respectively, of inventories
        have
        been classified as long-term assets. (See Note 3.)
  **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-8
  **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.
  **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.
  **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.
  **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 year ended February 28, 2006:
  2006Net
                  income (loss), as reported
              
              $
              6,864,488Intrinsic
                  value expense
              
              
              -Stock-based
                  employee compensation expense determined under fair value presentation
                  for
                  all options
              
              
              -Pro
                  forma net income (loss)
              
              $
              6,864,488Basic
                  income (loss) per common share:As
                  reported
              
              $
              2.24Pro
                  forma
              
              $
              2.24
  During
        the year ended February 29, 2008, the Company granted 1,491,500 options to
        purchase our stock at prices of $2.00 and $3.00. The options granted are
        subject
        to shareholder approval of the 2006 Stock Option Plan that was adopted by
        the
        Company’s Board of Directors in September, 2006. There were no options granted
        during the years ended February 28, 2006 and 2007.
  F-9
  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 29, 2008, February 28, 2007 and February 28, 2006.
  **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 29, 2008
        and
        February 28, 2007.
  **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.
  F-10
  **Major
        Customers**
  During
        the year ended February 29, 2008, we conducted business with three major
        customers whose net sales comprised 42% of net sales. As of February 29,
        2008,
        three customers accounted for 30% of net accounts receivable. During the
        year
        ended February 28, 2007, we conducted business with two customers whose net
        sales comprised 24% of net sales. As of February 28, 2007, two customers
        accounted for 39% of net accounts receivable.
  **Recently
        Issued Accounting Pronouncements**
  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. FAS 159 is effective for fiscal
        years beginning after November 15, 2007. Early adoption is permitted subject
        to
        specific requirements outlined in the new Statement. Therefore, calendar-year
        companies may be able to adopt FAS 159 for their first quarter 2007 financial
        statements.
 
 The
        new
        Statement allows entities to choose, at specified election dates, to measure
        eligible financial assets and liabilities at fair value that are not otherwise
        required to be measured at fair value. If a company elects the fair value
        option
        for an eligible item, changes in that item's fair value in subsequent reporting
        periods must be recognized in current earnings. FAS 159 also establishes
        presentation and disclosure requirements designed to draw comparison between
        entities that elect different measurement attributes for similar assets and
        liabilities.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
        Consolidated Financial Statements”. This Statement amends ARB 51 to establish
        accounting and reporting standards for the non-controlling (minority) interest
        in a subsidiary and for the deconsolidation of a subsidiary. It clarifies
        that a
        non-controlling interest in a subsidiary is an ownership interest in the
        consolidated entity that should be reported as equity in the consolidated
        financial statements. SFAS No. 160 is effective for the Company’s fiscal year
        beginning October 1, 2009. Management is currently evaluating the effect
        of this
        pronouncement on financial statements.
  F-11
  In
        December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
        Statement replaces SFAS No. 141, Business Combinations. This Statement retains
        the fundamental requirements in Statement 141 that the acquisition method
        of
        accounting (which Statement 141 called the purchase method) be used for all
        business combinations and for an acquirer to be identified for each business
        combination. This Statement also establishes principles and requirements
        for how
        the acquirer: a) recognizes and measures in its financial statements the
        identifiable assets acquired, the liabilities assumed, and any non-controlling
        interest in the acquiree; b) recognizes and measures the goodwill acquired
        in
        the business combination or a gain from a bargain purchase and c) determines
        what information to disclose to enable users of the financial statements
        to
        evaluate the nature and financial effects of the business combination. SFAS
        No.
        141(R) will apply prospectively to business combinations for which the
        acquisition date is on or after Company’s fiscal year beginning October 1, 2009.
        While the Company has not yet evaluated this statement for the impact, if
        any,
        that SFAS No. 141(R) will have on its consolidated financial statements,
        the
        Company will be required to expense costs related to any acquisitions after
        September 30, 2009.
 
 In
        March
        2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
        Instruments and Hedging Activities. The new standard is intended to improve
        financial reporting about derivative instruments and hedging activities by
        requiring enhanced disclosures to enable investors to better understand their
        effects on an entity’s financial position, financial performance, and cash flows
        The new standard also improves transparency about the location and amounts
        of
        derivative instruments in an entity’s financial statements; how derivative
        instruments and related hedged items are accounted for under Statement 133;
        and
        how derivative instruments and related hedged items affect its financial
        position, financial performance, and cash flows. . It is effective for financial
        statements issued for fiscal years and interim periods beginning after November
        15, 2008, with early application encouraged. Management is currently evaluating
        the effect of this pronouncement on financial statements.
 
 In
        May of
        2008, FSAB issued SFASB No.162, The Hierarchy of Generally Accepted Accounting
        Principles. The pronouncement mandates the GAAP hierarchy reside in the
        accounting literature as opposed to the audit literature. This has the practical
        impact of elevating FASB Statements of Financial Accounting Concepts in the
        GAAP
        hierarchy. This pronouncement will become effective 60 days following SEC
        approval. The company does not believe this pronouncement will impact its
        financial statements.
 
 In
        May of
        2008, FASB issued SFASB No. 163, Accounting for Financial Guarantee Insurance
        Contracts-an interpretation of FASB Statement No. 60. The scope of the statement
        is limited to financial guarantee insurance (and reinsurance) contracts.
        The
        pronouncement is effective for fiscal years beginning after December 31,
        2008.
        The company does not believe this pronouncement will impact its financial
        statements.
  **NOTE
        3 - INVENTORIES**
  Inventories
        at February 29, 2008 and February 28, 2007 consisted of the
        following:
  2008
              
              2007Raw
                  materials
              
              $
              2,915,168
              
              $
              2,939,395Finished
                  goods
              
              
              3,783,183
              
              
              4,274,5026,698,351
              
              
              7,213,897Reserve
                  for potential product obsolescence
              
              
              (2,566,487
              )
              
              (2,848,609
              )4,131,864
              
              
              4,365,288Non-current
                  portion
              
              
              (2,473,952
              )
              
              (3,195,523
              )Discount
                  on long term inventory
              
              
              (157,912
              )
              
              (419,765
              )Current
                  portion
              
              $
              1,500,000
              
              $
              750,000
  F-12
  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 29, 2008 and February 28, 2007, which are not expected to be realized
        within a 12-month period have been reclassified as long term.
  We
        assessed the net realizability of these assets, and the potential obsolescence
        of inventory. In accordance with this assessment, management has recorded
        a
        reserve of $2,566,487 and $2,848,609 at February 29, 2008 and February 28,
        2007,
        respectively. Management has recorded a discount on long term inventory of
        $157,912 and $419,765 at February 29, 2008 and February 28, 2007,
        respectively.
  **NOTE
        4 - PROPERTY, PLANT, AND EQUIPMENT**
  Property,
        plant, and equipment at February 29, 2008 and February 28, 2007 consists
        of the
        following:
  2008
              
              2007Machinery
                  and equipment
              
              $
              1,055,845
              
              $
              903,017Furniture
                  and fixtures
              
              
              1,411,283
              
              
              1,399,6362,467,128
              
              
              2,302,653Less
                  accumulated depreciation and amortization
              
              
              2,273,223
              
              
              2,244,136Property,
                  plant and equipment, net
              
              $
              193,905
              
              $
              58,517
  Depreciation
        and amortization expense was $35,462, $30,948, and $65,091 for the years
        ended
        February 29, 2008, February 28, 2007 and February 28, 2006,
        respectively.
   In
        December 2005, our majority owned subsidiary, Aura Realty, sold the buildings
        we
        operate in to an unrelated third party for gross proceeds of $8,750,000.
        After
        satisfaction of the mortgage liabilities and payment of the costs of the
        sale,
        approximately $2.9 million was due us. From this amount, $1.9 million was
        paid
        to the minority shareholder, approximately $470,000 was used to satisfy
        outstanding legal bills, and the balance of $595,000 was received by the
        Company
        in March of 2006. We then entered into a lease arrangement with the purchasers
        to lease one of the properties for a period of two years beginning January
        1,
        2006.
   **NOTE
        5 - NOTES PAYABLE**
   Notes
        payable at February 29, 2008 and February 28, 2007 consisted of the
        following:
  2008
              
              2007Notes
                  payable (a)
              
              $
              2,003,249
              
              $
              2,594,529Convertible
                  note payable (b)
              
              
              710,886
              
              
              -2,714,135
              
              
              2,594,529Less
                  current portion
              
              
              824,358
              
              
              611,411Long-term
                  portion
              
              $
              1,889,777
              
              $
              1,983,118
  (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 29, 2008 and February
                  28,
                  2007, $34,454 and $167,346 accrued and unpaid interest was added
                  to the
                  principal balance of the notes. Interest expense for the year ended
                  February 29, 2008 and February 28, 2008 are $ 157,024 and $ 160,749
                  respectively. During the year ended February 29, 2008, the Company
                  issued
                  183,533 shares for the settlement of $183,533 of the secured note
                  payable.
                  These shares were valued at the fair market value of $267,957 and
                  a loss
                  on settlement of debt of $84,425 was recorded in the accompanying
                  financials. Subsequent to year end, 430,329 warrants held by the
                  note-holders were converted into common stock in lieu of payments
                  on the
                  notes.
  (b)
              Consists
                  of convertible notes payable bearing interest at a rate of 7% due
                  in 2013.
                  The notes are convertible into our common stock at a price of $3.00
                  per
                  share. During the year ended February 29, 2008, $6,886 accrued
                  and unpaid
                  interest was added to the principal balance of the
                  notes.
  F-13
  Future
        maturities of notes payable at February 29, 2008 are as follows:
  Year
                  Ending February 28,2009
              
              $
              824,3582010
              
              
              611,2332011
              
              
              574,5442012
              
              
              -2013
              
              
              704,000Total
              
              $
              2,714,135
  **Note
        6 - NOTES PAYABLE - RELATED PARTY**
  Consists
        of a note payable to a member of our Board of Directors, payable on demand,
        bearing interest at a rate of 10% per annum. During the year ended February
        29,
        2008, $9,863 accrued and unpaid interest was added to the principal balance
        of
        the notes.
  **NOTE
        7 - ACCRUED EXPENSES**
  Accrued
        expenses at February 29, 2008 and February 28, 2007 consisted of the
        following:
  2008
              
              2007Accrued
                  payroll and related expenses
              
              $
              461,515
              
              $
              324,636Other
              
              
              68,361
              
              
              145,456Total
              
              $
              529,876
              
              $
              470,092
  **NOTE
        8 - COMMITMENTS AND CONTINGENCIES**
  **Leases**
  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
        anticipate moving to this facility in the second quarter of fiscal 2009,
        when
        the build-out of the new facility is completed. Until such time we are on
        a
        month to month lease in our current facility. Rent expense charged to operations
        amounted to $300,629, $268,380, and $858,368 for the years ended February
        29,
        2008, February 28, 2007 and February 28, 2006, respectively.
  F-14
  **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**
  **Preferred
        Stock**
  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, effective February
        28,
        2006.
  **Common
        Stock**
  At
        February 29, 2008, February 28, 2007 and 2006, we had 50,000,000 shares of
        $0.0001 par value common stock authorized for issuance. During the years
        ended
        February 29, 2008 and February 28, 2007, we issued 9,087,901 and 4,412,928
        shares of common stock, respectively.
  In
        the
        year ended February 29, 2008, we issued 6,891,791 shares of common stock
        for
        cash proceeds of $6,433,088; we issued 2,012,577 shares of common stock as
        penalty shares for failure to timely file a registration statement, and we
        issued 183,533 shares of common stock in satisfaction of $183,533 of secured
        notes payable. The shares issued were valued at the fair market value of
        $267,958 and a loss on settlement of debt of $84,425 was recorded in the
        accompanying financials.
  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
  F-15
  **Director
        Stock Options**
  We
        had
        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.
  **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.
  As
        part
        of the reorganization plan, all outstanding employee options in both plans
        were
        cancelled.
  In
        September, 2006, our Board of Directors adopted the 2006 Employee Stock Option
        Plan, subject to shareholder approval. Activity in this plan is as
        follows:
  2006
                  PlanWeighted-Average
                  Exercise Price
              
              Aggregate
                  Intrinsic Value
              
              Number
                  of OptionsOutstanding,
                  February 28, 2007
              
              
              -
              
              
              
              
              
              -Issued
              
              $
              2.00-3.00
              
              
              
              
              
              1,491,500Cancelled
              
              
              -
              
              
              
              
              
              -Outstanding,
                  February 29, 2008
              
              $
              2.00-3.00
              
              
              
              
              
              1,491,500
  The
        exercise prices for the options outstanding at February 29, 2008, and
        information relating to these options is as follows:
  Options
                  Outstanding
              
              Exercisable
                  OptionsRange
                  of Exercise
                Price
              
              Number
              
              Weighted
                  Average Remaining Life
              
              Weighted
                  Average Exercise Price
              
              Weighted
                  Average Remaining Life
              
              Number
              
              Weighted
                  Average Exercise Price$2.00-$3.00
              
              
              1,491,500
              
              
              5
                  years
              
              $
              2.26
              
              
              5
                  years
              
              
              9,50,000
              
              $
              2.00
  F-16
  **Warrants**
  Activity
        in issued and outstanding warrants is as follows:
  Number
                  of Shares
              
              Exercise
                  PricesOutstanding,
                  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
              
              $
              2.00-3.50Issued
              
              
              801,642
              
              $
              2.50-3.00Exercised
              
              
              -
              
              
              -Outstanding,
                  February 29, 2008
              
              
              6,980,179
              
              $
              2.00-4.00
  As
        part
        of the reorganization plan, all warrants outstanding as of January 31, 2006
        were
        cancelled.
   During
        the year ended February 29, 2008, we issued 776,642 warrants at an exercise
        price of $3.00 and 25,000 warrants to one of the Board members at an exercise
        price of $2.50. The company issued 90,000 warrants as rewards for consulting
        services. The grant date fair value of the warrants amounted to $82,974 which
        was calculated using the Black-Scholes option pricing model with the following
        assumptions: risk-free rate of return of 4%, volatility of 94%, and dividend
        yield of 0% and expected life of five years.
   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 29, 2008, 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$2.00-$3.00
              
              
              1,879,419
              
              
              1,658,586
              
              
              29
                  months
              
              $
              2.44
              
              $
              2.49
              
              $
              0.00$3.50
              
              
              805,589
              
              
              805,589
              
              
              47
                  months
              
              $
              3.50
              
              $
              3.50
              
              $
              0.00$4.00
              
              
              4,295,171
              
              
              4,295,171
              
              
              36
                  months
              
              $
              4.00
              
              $
              4.00
              
              $
              0.00
  **NOTE
        10 - GOING CONCERN**
 
 The
        accompanying financial statements have been prepared on a going concern basis
        which contemplates the realization of assets and the satisfaction of liabilities
        in the normal course of business. As shown in the financial statements, during
        the years ended February 29, 2008 and February 28, 2007, the Company incurred
        losses of $8,960,486 and $6,168,447, respectively and had negative cash flows
        from operating activities of $7,334,594 and $3,233,516, respectively during
        the
        years ended February 29, 2008 and February 28, 2007. The Company had an
        accumulated deficit of $354,121,403 as of February 29, 2008. Also, the Company
        was unable to pay the secured note installments.
  F-17
 
 If
        the
        Company is unable to generate profits and unable to continue to obtain financing
        for its working capital requirements, it may have to curtail its business
        sharply or cease business altogether.
  The
        financial statements do not include any adjustments relating to the
        recoverability and classification of liabilities that might be necessary
        should
        the Company be unable to continue as a going concern. The Company's continuation
        as a going concern is dependent upon its ability to generate sufficient cash
        flow to meet its obligations on a timely basis, to retain its current financing,
        to obtain additional financing, and ultimately to attain profitability.
 
 Substantial
        additional capital resources will be required to fund continuing expenditures
        related to our research, development, manufacturing and business development
        activities. During the year ended February 29, 2008, the Company completed
        a
        private placement wherein it raised $6,433,088 to be used to fund the Company’s
        working capital needs. Assurance cannot be given that this source of financing
        will continue to be available to the Company and demand for the Company’s equity
        instruments will be sufficient to meet its capital needs.
 
 The
        management plans to increase the business operations and debt
        financing.
  **NOTE
        11- INCOME TAXES**
  The
        Company did not record any income tax expense due to net loss during the
        years
        ended February 29, 2008 and February 28, 2007 and February 28, 2006. The
        actual
        tax benefit differs from the expected tax benefit computed by applying the
        United States corporate tax rate of 40% to loss before income taxes as follows
        for the years ended February 29, 2008 and February 28, 2007 and February
        28,
        2006:
  For
                  the year endedFebruary
                  29, 2008
              
              
              February
                  28, 2007
              
              
              February
                  28, 2006Current:
              
              $
              
              
              $
              
              
              $Federal
              
              
              -
              
              
              -
              
              
              -State
              
              
              800
              
              
              800
              
              
              800Total
              
              
              800
              
              
              800
              
              
              800DeferredFederal
              
              
              -
              
              
              -
              
              
              -State
              
              
              -
              
              
              -
              
              
              -Total
              
              
              -
              
              
              -
              
              
              -Total
                    Income Tax Provision
              
              $
              800
              
              $
              800
              
              $
              800
  The
        provision for income tax is included with other expense in the accompanying
        consolidated financial statements.
   2008
              
              2007
              
              2006Expected
                  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
              
              
              -
              %
              
              -
              %
              
              -
              %
  F-18
  The
        following table summarizes the significant components of our deferred tax
        asset
        at February 29, 2008 and February 28, 2007:
  2008
              
              2007Deferred
                  tax assetDeferred
                  tax carry-forward
              
              $
              121,373,000
              
              $
              119,900,000Valuation
                  allowance
              
              
              (121,373,000
              )
              
              (119,900,000
              )Net
                  deferred tax asset
              
              $
              -
              
              $
              -
  We
        recorded an allowance of 100% for its net operating loss carry-forward due
        to
        the uncertainty of its realization.
  Provision
        for income taxes has not been provided in these financial statements due
        to the
        net loss. At February 29, 2008, we had operating loss carry-forwards of
        approximately $303,432,550, which expire through 2023.
  **NOTE
        12 - 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 29, 2008, February 28, 2007 and February
        28,
        2006.
  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
        $18,197, $8,196 and $10,552 for the years ended February 29, 2008, February
        28,
        2007 and February 28, 2006, respectively.
  **NOTE
        13 - 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 29, 2008 and February 28, 2007 and February 28, 2006:
  2008
              
              2007
              
              2006United
                  States
              
              $
              2,310,747
              
              $
              1,416,145
              
              $
              1,583,509Canada
              
              
              155,344
              
              
              198,737
              
              
              105,243Europe
              
              
              8,020
              
              
              4,948
              
              
              7,246Asia
              
              
              341,286
              
              
              4,244
              
              
              60,107Africa
              
              
              33,934
              
              
              -
              
              
              -Total
              
              $
              2,849,331
              
              $
              1,624,074
              
              $
              1,756,105
  F-19
  **NOTE
        14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)**
  The
        following tables list our quarterly financial information for the years ended
        February 29, 2008, February 28, 2007 and February 28, 2006:
  2008First
                Quarter
              
              Second
                  Quarter
              
              Third
                Quarter
              
              Fourth
                  Quarter
              
              Total
                YearNet
                  revenues
              
              $
              663,918
              
              $
              382,845
              
              $
              861,821
              
              $
              940,747
              
              $
              2,849,331Gross
                  profit
              
              $
              216,592
              
              $
              102,605
              
              $
              140,343
              
              $
              590,755
              
              $
              1,050,295Loss
                  from operations
              
              $
              (1,355,188
              )
              $
              (1,978,030
              )
              $
              (1,993,184
              )
              $
              (3,411,732
              )
              $
              (8,738,134
              )Net
                  loss
              
              $
              (1,363,628
              )
              $
              (2,017,740
              )
              $
              (2,032,177
              )
              $
              (3,546,941
              )
              $
              (8,960,486
              )Basic
                  and diluted loss per share
              
              $
              (0.05
              )
              $
              (0.06
              )
              $
              (0.06
              )
              $
              (0.11
              )
              $
              (0.28
              )
  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
              )
  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
  F-20
  **NOTE
        15 - SUBSEQUENT EVENTS**
 
 Subsequent
        to year end, the Company entered into an agreement with Emerald Commercial
        Leasing, Inc., whereby the Company will acquire the transport refrigeration
        assets of Emerald, valued at approximately $385,000. The Company will also
        be
        hiring some of the employees of Emerald, and has entered into an employment
        agreement with its President, Mr. Joseph Dickman, effective August 1, 2008.
        The
        Company is also negotiating to purchase the service and installation facilities
        of Emerald, which comprises approximately 6 acres of land, including a service
        facility.
 
 In
        March
        of 2008, the Company’s Board of Directors authorized the modification of the
        terms of the warrants that had been issued to creditors and investors as
        a
        result of the Company’s bankruptcy filing. The revised terms allow the warrant
        holders to immediately exercise their warrants at a price of $1.00 per share,
        reduce the exercise price to $2.00 per share while modifying the expiration
        date
        to January 31, 2009, or continue to hold the warrants with no change in the
        terms.
  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
 May
        21,
        2008
  F-21
  **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**February
                  29, 2008
              
              $
              164,241
              
              $
              -
              
              $
              64,941
              
              $
              99,300February
                  28, 2007
              
              $
              164,241
              
              $
              -
              
              $
              -
              
              $
              164,241February
                  28, 2006
              
              $
              2,220,474
              
              $
              -
              
              $
              2,056,233
              
              $
              164,241**Reserve
                  for obsolete inventories (see Note 3)**February
                  29, 2008
              
              $
              3,268,374
              
              $
              52,675
              
              $
              596,650
              
              $
              2,724,399February
                  28, 2007
              
              $
              2,967,751
              
              $
              300,623
              
              $
              -
              
              $
              3,268,374February
                  28, 2006
              
              $
              4,038,047
              
              $
              -
              
              $
              1,070,296
              
              $
              2,967,751
    F-22