SUBORDINATION AGREEMENT


         THIS  SUBORDINATION  AGREEMENT,  dated as of May __, 2000,  is made and
given by AURA CERAMICS,  INC., a Delaware corporation and AURA SYSTEMS,  INC., a
Delaware corporation (jointly and severally,  the "Junior Creditor") in favor of
EXCEL BANK, a Minnesota state banking corporation (the "Senior Creditor").

RECITALS:

         A. Alpha Ceramics, Inc., a Minnesota corporation (the "Borrower") is or
may hereafter become indebted to the Junior Creditor  pursuant to Section 2.4 of
that certain Asset Purchase  Agreement,  dated as of February 29, 2000,  between
the Junior  Creditor and the Borrower (the "Asset  Purchase  Agreement")  and/or
pursuant to other  documents or  instruments  executed in  connection  therewith
and/or  by  reason of loans or other  extensions  of  credit or other  financial
accommodations now or hereafter made or to be made by the Junior Creditor to the
Borrower (collectively, the "Subordinated Agreements").

         B. The  Borrower is now, or may  hereafter  be,  indebted to the Senior
Creditor as a result of the advance of monies and other  extensions of credit by
the Senior  Creditor  to the  Borrower  under a  Revolving  Credit and Term Loan
Agreement  dated as of May ___,  2000 (as the same may be  amended,  restated or
otherwise modified from time to time hereafter,  the "Credit Agreement") between
the Borrower and the Senior Creditor and under other  agreements or arrangements
for the extension of financial  accommodations  now,  heretofore or hereafter in
effect.

         C. The Junior Creditor  acknowledges that the loan or advance of monies
or other extensions of any financial  accommodation or credit to the Borrower by
the Senior Creditor is of value to the Junior Creditor.

         NOW, THEREFORE,  for good and valuable consideration,  receipt of which
is hereby acknowledged by the Junior Creditor, and in order to induce the Senior
Creditor to make loans or extend credit or any other financial  accommodation to
or for the  benefit of the  Borrower,  or to grant such  renewals  or  extension
thereof as the Senior  Creditor  may deem  advisable,  and to better  secure the
Senior  Creditor in respect of the foregoing,  the Junior Creditor hereby agrees
as follows:

         Section 1.  Definitions, Rules of Constructions.

                  (a) For purpose of this  Agreement,  the following terms shall
have the following meanings:

                  "Asset  Purchase  Agreement"  shall have the meaning  given to
         that  term in  Recital  A above,  and  shall  include  any  amendments,
         modifications  or restatements  thereto or thereof (but nothing in this
         definition  shall be deemed to waive the provisions of Section 11 below
         requiring the Senior  Creditor's prior written consent to any change in
         the Asset Purchase Agreement).

     "Bankruptcy  Code" shall mean 11 U.S.C.  ss. 101 et seq.,  as amended  from
time to time.

          "Borrower"   shall  mean  Alpha  Ceramics,   Inc.  and  any  successor
     (including a  debtor-in-possession  under the Bankruptcy  Code),  assignee,
     receiver, trustee or estate thereof.

                  "Credit  Agreement"  shall have the meaning given to that term
         in Recital B above, and shall include any amendments,  modifications or
         restatements  thereto or thereof  and any  credit  agreement  hereafter
         entered into in replacement thereof.

                  "Default" shall mean any event which with the giving of notice
         or lapse of time, or both, would become an Event of Default.

                  "Event of  Default"  shall mean (i) any Event of  Default  (as
         therein  defined) under the Credit  Agreement,  (ii) any failure of the
         Borrower  to pay when due  (whether at the date  scheduled  therefor or
         earlier  upon  acceleration),  or when  demanded  (with  respect to any
         obligation  payable on demand),  any item constituting  Senior Debt, or
         (iii) any event shall occur or condition shall exist and shall continue
         for more than the period of grace, if any, applicable thereto and shall
         have the effect of causing,  or permitting  the Senior  Creditor or any
         subsequent  holder of Senior Debt to cause,  any item of Senior Debt to
         become  due  prior  to its  stated  maturity  or to  realize  upon  any
         collateral given as security therefor.

                  "Junior  Creditor" shall mean each of Aura Ceramics,  Inc. and
         Aura   Systems,   Inc.,   and  any  successor   thereto   (including  a
         debtor-in-possession  under the Bankruptcy Code),  assignee,  receiver,
         trustee or estate thereof, jointly and severally.

          "Permitted Payments" shall have the meaning given in Section 3 below.

                  "Person" shall mean an individual,  corporation,  association,
         partnership,  limited partnership,  trust, organization,  individual or
         government  or any  governmental  agency or any  political  subdivision
         thereof.

                  "Senior  Creditor"  shall mean Excel Bank,  and its successors
         and its assignees with respect to any of the Senior Debt.

                  "Senior Debt" shall mean all  liabilities  and  obligations of
         the  Borrower  to the Senior  Creditor  howsoever  created,  arising or
         evidenced,  whether direct or indirect,  absolute or contingent, due or
         to  become  due,  now  existing  or  hereafter   arising  or  incurred,
         including, without limitation, all of the Borrower's obligations to the
         Senior  Creditor  under  the  Credit  Agreement  and any  note or notes
         executed by the Borrower  thereunder,  and all other  obligations under
         any other agreement between the Borrower and the Senior Creditor now or
         hereafter in effect, and also including,  without  limitation,  any and
         all interest  accruing on any of the Senior Debt after the commencement
         of any proceedings referred to in Section 5 below,  notwithstanding any
         provision or rule of law which might  restrict the rights of the Senior
         Creditor,  as against the  Borrower  or anyone  else,  to collect  such
         interest.

                  "Subordinated  Debt" shall mean all  obligations,  liabilities
         and  indebtedness  of the  Borrower to the Junior  Creditor,  howsoever
         arising  or  evidenced,   whether  direct  or  indirect,   absolute  or
         contingent,  due or to become due, now existing or hereafter arising or
         incurred, under any written or unwritten agreement,  including, without
         limitation, the Subordinated Agreements.

                  "Subordinated Agreements" shall have the meaning given to such
         term  in  Recital  A  above,   and  shall   include   any   amendments,
         modifications, substitutions or restatements thereto or thereof and any
         note or agreement  hereafter  entered into in replacement  thereof (but
         nothing in this  definition  shall be deemed to waive the provisions of
         Section 11 below requiring the Senior  Creditor's prior written consent
         to any change in any  instrument or agreement  evidencing  Subordinated
         Debt).

                  (b) In this Agreement,  in the computation of a period of time
         from a  specified  date to a later  specified  date,  unless  otherwise
         stated the word "from" means "from and  including" and the word "to" or
         "until" each means "to but excluding."

                  (c)  Other  terms  may be  defined  in  other  parts  of  this
         Agreement.   All  references  to  agreements   and  other   contractual
         instruments  shall be  deemed  to  include  all  subsequent  amendments
         thereto  or  changes  therein  entered  into in  accordance  with their
         respective  terms,  and all  references  to Persons  shall be deemed to
         include their permitted  successors and assigns.  Unless the context in
         which used herein otherwise  clearly  requires,  "or" has the inclusive
         meaning  represented  by the phrase  "and/or."  All  incorporations  by
         reference of covenants,  terms,  definitions or other  provisions  from
         other  agreements  are  incorporated  into  this  Agreement  as if such
         provisions  were fully set forth  herein,  and  include  all  necessary
         information and related provisions from such other agreements,  and all
         such  covenants,  terms,  definitions  or other  provisions  from other
         agreements  incorporated into this Agreement by reference shall survive
         any termination of such other agreements until the Senior Debt has been
         paid in full and all  financing  arrangements  between the Borrower and
         the Senior Creditor shall have been terminated.

         Section 2. Standby;  Subordination.  The payment and performance of the
Subordinated Debt is hereby  subordinated to the payment and performance in full
of the Senior  Debt,  and,  except as set forth in  Section 3 below,  the Junior
Creditor will not ask, demand, sue for, take or receive from the Borrower or any
other Person  liable for all or any part of the Senior Debt, by setoff or in any
other  manner,  the whole or any part of the  Subordinated  Debt,  or any monies
which may now or hereafter be owing in respect of the Subordinated Debt (whether
such amounts  represent  principal or interest,  or obligations which are due or
not due,  direct  or  indirect,  absolute  or  contingent),  including,  without
limitation,  taking any security for any of the foregoing,  or the taking of any
negotiable  instrument  therefor,  unless and until all of the Senior Debt shall
have been fully paid and satisfied and all  financing  arrangements  between the
Borrower and Senior Creditor have been terminated.  The Junior Creditor warrants
and represents that the  Subordinated  Debt is unsecured and agrees that (a) the
Junior  Creditor  hereafter  will not  accept  any  security  therefor  from the
Borrower,  or from any third Person for the benefit of the Borrower;  and (b) in
the event the Junior  Creditor  does obtain any  security  for the  Subordinated
Debt, (i) all liens and security  interests of the Junior Creditor in any assets
of the  Borrower or any assets  securing the Senior Debt shall be and hereby are
subordinated  to the rights and  interests  of the Senior  Creditor,  if any, in
those assets,  (ii) the Junior Creditor shall have no right to possession of any
such assets or to foreclose upon any such assets,  whether by judicial action or
otherwise,  unless and until all the Senior  Debt shall have been fully paid and
satisfied  and all  financing  arrangements  between  the  Borrower  and  Senior
Creditor have been terminated,  and (iii) at the request of the Senior Creditor,
the Junior  Creditor  shall  execute  and  deliver to the Senior  Creditor  such
termination  statements  and releases as the Senior  Creditor  shall  reasonably
request to release the Junior  Creditor's  security  interest in or lien against
such property.  The Junior Creditor,  prior to the payment in full and discharge
of the Senior Debt and the termination of all financing arrangements between the
Borrower and the Senior Creditor,  shall have no right to enforce any claim with
respect to the Subordinated  Debt, or to take any action against the Borrower or
the property of the  Borrower or of any other Person  liable for all or any part
of the  Senior  Debt  for the  benefit  of the  Borrower.  The  Junior  Creditor
acknowledges  and agrees that,  to the extent the terms and  provisions  of this
Agreement  are  inconsistent  with any  agreement or  understanding  between the
Junior  Creditor and the  Borrower,  such  agreement or  understanding  shall be
subject to this Agreement.

         Section  3.  Permitted  Payments.  Notwithstanding  the  provisions  of
Section 2 above,  until the Senior  Creditor gives the Junior  Creditor  written
notice (in the manner set forth below) of the  occurrence of an Event of Default
or a Default, and provided that:

                  (i)      there  shall  not  then  exist  any  breach  of  this
                           Agreement by the Junior  Creditor  which has not been
                           waived, in writing, by the Senior Creditor,

                  (ii)     at the time of the payment  described  below no Event
                           of Default exists and is continuing,

                  (iii)    the payment  described below, if made, would not give
                           rise to the occurrence of any Event of Default, and

                  (iv)   none of the events described in Section 5 has occurred,

the Borrower may pay to the Junior Creditor,  and the Junior Creditor may accept
from  the  Borrower,   interest  and   principal   payments  when  due  (without
acceleration)  as provided in Section 2.4 of the Asset  Purchase  Agreement (the
"Permitted Payments").

         Section  4.  Subordinated  Debt Owed Only to the Junior  Creditor.  The
Junior  Creditor  warrants  and  represents  that the  Junior  Creditor  has not
previously  assigned any interest in the Subordinated Debt, that no other Person
owns  an  interest  in the  Subordinated  Debt  (whether  as  joint  holders  of
Subordinated Debt,  participants or otherwise) and that the entire  Subordinated
Debt is owing only to the Junior Creditor. The Junior Creditor further covenants
that the entire  Subordinated Debt shall continue to be owing only to the Junior
Creditor  unless it is  assigned  with the prior  written  consent of the Senior
Creditor  to a Person who agrees  with the  Senior  Creditor  to be bound by the
subordination provisions set forth herein.

         Section 5. Priority. In the event of (a) any distribution, division, or
application,  partial or complete, voluntary or involuntary, by operation of law
or  otherwise,  of all or any part of the assets of the Borrower or the proceeds
thereof  to the  creditors  of the  Borrower  or to  their  claims  against  the
Borrower,  or (b) any  readjustment  of the debt or obligations of the Borrower,
whether  by  reason  of  liquidation,  bankruptcy,  arrangement,   receivership,
assignment  for the  benefit  of  creditors  or any other  action or  proceeding
involving the readjustment of all or any part of the Senior Debt or Subordinated
Debt,  or the  application  of the  assets of the  Borrower  to the  payment  or
liquidation  thereof, or (c) the dissolution or other winding up of the business
of the Borrower,  or (d) the sale of all or  substantially  all of the assets of
the Borrower, then, and in any such event, the Senior Creditor shall be entitled
to receive payment in full of all of the Senior Debt prior to the payment of all
or any part of the Subordinated Debt.

          Section 6. Grant of Authority to Senior  Creditor.  In order to enable
the Senior  Creditor  to enforce its rights  hereunder  in any of the actions or
proceedings  described in Section 5, the Senior  Creditor is hereby  irrevocably
authorized  and  empowered,  in its  discretion,  to file and present for and on
behalf  of the  Junior  Creditor  such  proofs of  claims  or other  motions  or
pleadings as the Senior  Creditor may deem  expedient or proper to establish the
Senior  Creditor's  entitlement  of  payment  from,  or on behalf of, the Junior
Creditor with respect to the Subordinated Debt and to vote such proofs of claims
in any such proceeding and to demand,  sue for,  receive and collect any and all
dividends or other payments or  disbursements  made thereon in whatever form the
same may be paid or issued and to apply the same on account of any of the Senior
Debt.  The  Junior  Creditor  irrevocably  authorizes  and  empowers  the Senior
Creditor  to demand,  sue for,  collect  and receive  each of the  payments  and
distributions  described in Section 5 above and give acquittance therefor and to
file claims and take such other actions, in the Senior Creditor's own name or in
the name of the Junior  Creditor or otherwise,  as the Senior  Creditor may deem
necessary or advisable for the enforcement of this Agreement. To the extent that
payments  of  distributions  are made in  property  other than cash,  the Junior
Creditor authorizes the Senior Creditor to sell such property to such buyers and
on such terms as the Senior Creditor,  in its sole discretion,  shall determine.
The Junior  Creditor will execute and deliver to the Senior Creditor such powers
of  attorney,   assignments  and  other  instruments  or  documents,   including
debentures  (together  with  such  assignments  or  endorsements  as the  Senior
Creditor  shall deem  necessary),  as may be reasonably  requested by the Senior
Creditor  in order to enable the Senior  Creditor  to enforce any and all claims
upon or with respect to any or all of the  Subordinated  Debt and to collect and
receive  any  and  all  payments  and  distributions  which  may be  payable  or
deliverable at any time upon or with respect to the  Subordinated  Debt, all for
the Senior Creditor's own benefit.

         Section  7.  Payments  Received  by the  Junior  Creditor.  Except  for
Permitted Payments,  if the Junior Creditor receives any payment or distribution
or  security  or  instrument  or proceeds  thereof  upon or with  respect to the
Subordinated  Debt  prior  to the  payment  in  full  of  the  Senior  Debt  and
termination  of all financing  arrangements  between the Borrower and the Senior
Creditor,  the Junior  Creditor  shall  receive  and hold the same in trust,  as
trustee,  for the benefit of the Senior Creditor and shall forthwith deliver the
same to the Senior  Creditor  in  precisely  the form  received  (except for the
endorsement  or  assignment  by  the  Junior  Creditor  where  necessary),   for
application  on any of the Senior Debt,  due or not due and, until so delivered,
the same shall be held in trust by the Junior  Creditor  as the  property of the
Senior Creditor.  In the event of the failure of the Junior Creditor to make any
such endorsement or assignment to the Senior Creditor,  the Senior Creditor,  or
any of its officers or employees,  is hereby irrevocably  authorized to make the
same.

         Section 8. Continuing Nature of Subordination.  This Agreement shall be
effective and may not be terminated or otherwise  revoked by the Junior Creditor
until  the  Senior  Debt  shall  have been  fully  paid and  discharged  and all
financing  arrangements  between the Borrower and the Senior  Creditor have been
terminated.  This is a  continuing  agreement  of  subordination  and the Senior
Creditor may continue, at any time and without notice to the Junior Creditor, to
extend credit or other  financial  accommodations  and loan monies to or for the
benefit of the Borrower in reliance hereon. No obligation of the Junior Creditor
hereunder shall be affected by the dissolution, liquidation, death or incapacity
of, or written  revocation  by, the Junior  Creditor  or any other  subordinated
party, pledgor, endorser, or guarantor, if any.

         Section 9. Additional  Agreements Between Senior Creditor and Borrower.
The  Senior  Creditor,  at any time and from time to time,  may enter  into such
agreement  or  agreements  with the  Borrower  as the Senior  Creditor  may deem
proper,  increasing the amount of,  extending the time of payment of or renewing
or  otherwise  altering  the terms of all or any of the Senior Debt or affecting
any security  underlying any or all of the Senior Debt, and may exchange,  sell,
release,  surrender or otherwise deal with any such security, without in any way
thereby impairing or affecting this Agreement.

         Section 10.  Bankruptcy  Issues. If the Borrower becomes the subject of
proceedings  under the  Bankruptcy  Code and if the Senior  Creditor  desires to
permit the use of cash collateral or to provide  financing to the Borrower under
either  Section 363 or Section 364 of the Bankruptcy  Code, the Junior  Creditor
agrees  that  adequate  notice of such  financing  to the  Junior  Creditor,  if
required under  applicable  law, shall have been provided if the Junior Creditor
receives notice two (2) business days prior to entry of any order approving such
cash  collateral  usage or financing.  Notice of a proposed  financing or use of
cash  collateral  shall be deemed  given upon the  sending of such notice to the
Junior Creditor in the manner specified in Section 16, below. All allocations of
payments  between the Senior  Creditor and the Junior Creditor shall continue to
be made after the filing of a petition  under the  Bankruptcy  Code on the basis
provided in this  Agreement.  In the event that the Junior  Creditor at any time
acquires any security for the Subordinated  Debt, the Junior Creditor agrees not
to assert any right the Junior Creditor may have to "adequate protection" of the
Junior Creditor's interest in such security in any Bankruptcy proceeding,  or to
seek to have the Junior Creditor's claims in such Bankruptcy  proceeding treated
as "secured  claims" under Section  506(a) of the Bankruptcy  Code,  without the
prior written  consent of the Senior  Creditor.  The Junior  Creditor waives any
claim the Junior  Creditor may now or hereafter have against the Senior Creditor
arising out of the Senior  Creditor's  election,  in any  proceeding  instituted
under  Chapter  11 of  the  Bankruptcy  Code,  of  the  application  of  Section
1111(b)(2) of the Bankruptcy  Code,  and/or any borrowing or grant of a security
interest under Section 364 of the Bankruptcy Code by the Borrower,  as debtor in
possession,  or by a trustee.  To the extent that the Senior  Creditor  receives
payments  on, or  proceeds  of any  collateral  for,  the Senior  Debt which are
subsequently  avoided,  invalidated,  declared to be fraudulent or preferential,
set aside and/or required to be repaid to a trustee, receiver or any other party
under any Bankruptcy law, state or federal law,  common law or equitable  cause,
then,  to the extent of such payment or proceeds  received,  the Senior Debt, or
part  thereof,  intended to be  satisfied  shall be revived and continue in full
force and effect as if such  payments or proceeds  had not been  received by the
Senior Creditor.

         Section  11.   Instrument   Legend;   No  Amendments  to   Subordinated
Instruments.  Any agreement or instrument  evidencing the Subordinated  Debt, or
any portion  thereof,  which has been or is  hereafter  executed by the Borrower
will,  on the date hereof or the date of execution,  be inscribed  with a legend
conspicuously  indicating  that payment thereof is subordinated to the claims of
the Senior Creditor pursuant to the terms of this Agreement. The original of any
such  agreement or instrument  will be delivered to the Senior  Creditor  within
five (5) Business Days after the date hereof or the date of its  execution.  The
Junior  Creditor  will  not  agree  to  any  amendment,   restatement  or  other
modification  of any such  instrument  or  agreement  or any other  agreement or
document evidencing the Subordinated Debt,  including,  without limitation,  the
Asset  Purchase  Agreement and the other  Subordinated  Agreements,  without the
prior written consent of the Senior Creditor.

         Section 12. Waivers.  The Senior Debt shall be deemed to have been made
or incurred in  reliance  upon this  Agreement.  The Junior  Creditor  expressly
waives all notice of the acceptance by the Senior Creditor of the  subordination
and other  provisions of this  Agreement and all other notices not  specifically
required  pursuant  to the terms of this  Agreement  whatsoever,  and the Junior
Creditor expressly waives reliance by the Senior Creditor upon the subordination
and other  agreements as herein  provided.  The Junior  Creditor agrees that the
Senior  Creditor has made no warranties or  representations  with respect to the
due execution, legality, validity,  completeness or enforceability of the Credit
Agreement,  or the  collectability  of the  Senior  Debt,  and that  the  Senior
Creditor shall be entitled to manage and supervise its loans and other financial
accommodations  to the Borrower  without  regard to the  existence of any rights
that the Junior Creditor may now or hereafter have in or to any of the assets of
the Borrower.  The Junior Creditor agrees that the Senior Creditor shall have no
liability  to the Junior  Creditor  for,  and waives any claim  which the Junior
Creditor may now or hereafter have against,  the Senior Creditor  arising out of
any and all  actions  which the Senior  Creditor in good faith takes or omits to
take (including,  without  limitation,  actions with respect to any security for
the Senior Debt,  actions with respect to the occurrence of an Event of Default,
actions with respect to the foreclosure upon, sale, release, or depreciation of,
or failure to realize  upon,  any  security for the Senior Debt and actions with
respect to the  collection  of any claim for all or any part of the Senior  Debt
from any  guarantor  or other  party)  with  respect  to or any other  agreement
related  to any  Senior  Debt or to the  collection  of the  Senior  Debt or the
valuation, use, protection or release of any security for the Senior Debt.

         Section 13. Senior Creditor's  Waivers. No waiver shall be deemed to be
made by the Senior Creditor of any of its rights hereunder unless the same shall
be in writing signed on behalf of the Senior Creditor,  and each waiver, if any,
shall be a waiver only with respect to the specific  instance involved and shall
in no way impair the rights of the Senior  Creditor  or the  obligations  of the
Junior Creditor to the Senior Creditor in any other respect at any other time.

         Section 14.  Financial  Condition  of  Borrower;  Other  Actions by the
Senior Creditor.  The Junior Creditor hereby assumes  responsibility for keeping
informed of the financial  condition of the Borrower,  any and all endorsers and
any and all guarantors of the Subordinated  Debt and of all other  circumstances
bearing upon the risk of nonpayment  of the Senior Debt and/or the  Subordinated
Debt that diligent inquiry would reveal.  The Junior Creditor hereby agrees that
the  Senior  Creditor  shall  have no duty to  advise  the  Junior  Creditor  of
information  known to the Senior  Creditor  regarding such condition or any such
circumstances.  In the  event  the  Senior  Creditor,  in its  sole  discretion,
undertakes, at any time or from time to time, to provide any such information to
the Junior  Creditor,  the Senior  Creditor  shall be under no obligation (i) to
provide any such information to the Junior Creditor on any subsequent  occasion,
(ii) to undertake any  investigation not a part of its regular business routine,
or (iii) to disclose any information which, pursuant to its usual practices, the
Senior  Creditor  wishes to maintain  confidential.  The Junior  Creditor hereby
agrees that all  payments  received by the Senior  Creditor  may be applied,  in
whole or in part, to any of the Senior Debt, as the Senior Creditor, in its sole
discretion,  deems  appropriate  and assents to any extension or postponement of
the time of payment of the Senior Debt or to any other  indulgence  with respect
thereto, to any substitution, exchange or release of collateral which may at any
time secure the Senior Debt and to the  addition or release of any other  Person
primarily or secondarily liable therefor.

         Section  15.  Subrogation.  When the Senior  Debt shall have been fully
paid and discharged and all financing  arrangements between the Borrower and the
Senior Creditor have been terminated, the Junior Creditor shall be subrogated to
the rights of the Senior Creditor to receive  payments or distribution of assets
of the Borrower made on such Senior Debt until the principal of and premium,  if
any,  and  interest  on  (and  any  other  amounts  due  with  respect  to)  the
Subordinated  Debt shall be paid in full. For the purposes of such  subrogation,
no payments or  distributions  to the Senior  Creditor of any cash,  property or
securities  to which the  Junior  Creditor  would be  entitled  except for these
provisions  shall, as between the Borrower,  its creditors other than the Senior
Creditor,  and the Junior Creditor, be deemed to be a payment by the Borrower to
or on account of Senior Debt, it being  understood that these provisions in this
Section are used,  and are  intended,  solely for the  purpose of  defining  the
relative  rights  of the  Junior  Creditor,  on the one  hand,  and  the  Senior
Creditor, on the other hand.

         Section 16. Notices. All communications and notices provided under this
Agreement to any party shall be given in writing by manual  delivery,  facsimile
transmission,  overnight  courier  or United  States  first  class  mail to such
party's  address  shown on the  signature  page hereof,  or to any party at such
other  address  as may be  designated  by such  party in a notice  to the  other
parties.  All  periods of notice  shall be  measured  from the date of  delivery
thereof if  manually  delivered,  from the date of sending if sent by  facsimile
transmission,  from the first  business day after the date of sending if sent by
overnight courier, or from four days after the date of mailing if mailed.

         Section 17. Governing Law and Construction. THE VALIDITY,  CONSTRUCTION
AND  ENFORCEABILITY  OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF
THE STATE OF MINNESOTA,  WITHOUT  GIVING  EFFECT TO CONFLICT OF LAWS  PRINCIPLES
THEREOF.

         Section  18.  Consent  to  Jurisdiction.  AT THE  OPTION OF THE  SENIOR
CREDITOR, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE
COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE JUNIOR CREDITOR CONSENTS TO
THE  JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE
IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE JUNIOR CREDITOR COMMENCES ANY
ACTION  IN  ANOTHER  JURISDICTION  OR VENUE  UNDER ANY TORT OR  CONTRACT  THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP  CREATED BY THIS AGREEMENT,
THE SENIOR CREDITOR AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED
TO ONE OF THE  JURISDICTIONS  AND VENUES  ABOVE-DESCRIBED,  OR IF SUCH  TRANSFER
CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.

         Section 19. Waiver of Jury Trial. THE JUNIOR  CREDITOR,  AND THE SENIOR
CREDITOR BY ITS ACCEPTANCE HEREOF,  IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL
BY JURY IN ANY ACTION OR  PROCEEDING  TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS
AGREEMENT OR UNDER ANY AMENDMENT,  INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY
IN THE FUTURE BE  DELIVERED  IN  CONNECTION  HEREWITH OR ARISING FROM ANY CREDIT
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH
ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

         Section 20.  Severability.  Wherever  possible,  each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under  applicable law, such provision shall be ineffective to the extent
of such  prohibition or invalidity,  without  invalidating the remainder of such
provision or the remaining provisions of this Agreement.

         Section 21.  Miscellaneous.

                  (a) This  Agreement and the terms,  covenants  and  conditions
         hereof  shall  inure to the  benefit  of the  Senior  Creditor  and its
         successors and assigns. Nothing contained in this Agreement,  expressed
         or  implied,  is  intended  to confer  upon any  Person  other than the
         parties  hereto  and  thereto  any  rights,  remedies,  obligations  or
         liabilities hereunder or thereunder.

                  (b) This Agreement sets forth the entire  understanding of the
         parties hereto  relating to the subject  matter  hereof,  and all prior
         understandings  and negotiations,  written or oral, are merged into and
         superseded by this Agreement. Any modification,  amendment or waiver of
         this Agreement or any provision herein shall be binding upon the Senior
         Creditor  only if contained in a writing  signed by or on behalf of the
         Senior  Creditor.  No  failure on the part of the  Senior  Creditor  to
         exercise and no delay in exercising any power or right hereunder, shall
         operate as a waiver thereof;  nor shall any single or partial  exercise
         of any power or right preclude any other or further exercise thereof or
         the exercise of any other power or right.  The remedies herein provided
         are cumulative and not exclusive of any remedies provided by law.

                  (c) The Junior  Creditor hereby  acknowledges  that (i) it has
         been advised by counsel in the  negotiation,  execution and delivery of
         this Agreement,  (ii) the Senior Creditor has no fiduciary relationship
         to the Junior  Creditor,  and (iii) no joint venture exists between the
         Junior Creditor and the Senior Creditor.

                  (d) The section  titles  contained in this  Agreement  are and
         shall be without  substantive meaning or content of any kind whatsoever
         and are not a part of the agreement between the parties hereto.

                  (e) All covenants, agreements,  representations and warranties
         made  in  this  Agreement  and  in any  certificates  or  other  papers
         delivered by or on behalf of the Junior Creditor  pursuant hereto shall
         be deemed to have been  relied  upon by the Senior  Creditor  and shall
         survive  the  execution  and  delivery  of this  Agreement,  and  shall
         continue  in full force and effect so long as any Senior  Debt  remains
         outstanding  and  unpaid  or  any  financing  arrangement  between  the
         Borrower and the Senior Creditor  remains in effect.  All statements of
         fact relating to the Junior  Creditor  contained in any  certificate or
         other paper delivered to the Senior Creditor at any time after the date
         hereof by or on behalf of the  Junior  Creditor  pursuant  hereto or in
         connection with the transactions  contemplated  hereby shall constitute
         representations and warranties by the undersigned hereunder.

                  (f)  This   Agreement   may  be  executed  in  any  number  of
         counterparts,  all of which taken together shall constitute one and the
         same  instrument,  and  any of the  parties  hereto  may  execute  this
         Agreement by signing any such counterpart.


                                           (The signature page follows.)


<PAGE>


         IN WITNESS WHEREOF, this Subordination  Agreement has been signed as of
the date first set forth above.

            AURA CERAMICS, INC.


            By_________________________________
                   Its:_____________________________


            AURA SYSTEMS, INC.


            By_________________________________
                   Its:_____________________________

            Address for Notice:

            Aura Systems, Inc.
            Aura Ceramics, Inc.
            Michael I. Froch
            Office of the General Counsel
            2335 Alaska Avenue
            El Segundo, California 90245
            Fax: (310) 643-8719


            EXCEL BANK


            By_________________________________
                   Its:_____________________________

            Address for Notice:

            Excel Bank
            5050 France Avenue South
            Edina, Minnesota 55410
            Attention: Wes Beedon
            Fax: (612) 836-3160


<PAGE>


                          ACCEPTANCE AND ACKNOWLEDGMENT
         The Borrower named above hereby accepts,  and acknowledges receipt of a
copy of, the foregoing  Subordination  Agreement and agrees that it will not pay
any of the "Subordinated Debt" (as defined in the foregoing  Agreement) or grant
any security therefor, except as the foregoing Agreement provides.


                ALPHA CERAMICS, INC.

                By_________________________________
                       Its:_____________________________