<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-K

                /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997

              / / 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 0-9725

                            AURORA ELECTRONICS, INC.

             (Exact name of registrant as specified in its charter)

                    DELAWARE                              75-1539534

        (State or other jurisdiction of                 (I.R.S. Employer
         incorporation or organization)                Identification No.)

                 9477 WAPLES ST., SUITE 150, SAN DIEGO, CA 92121

               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (619) 552-1213

          Securities registered pursuant to Section 12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, $.03 par value per share

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. Yes [X] No [ ]

<PAGE>   2
The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 12, 1997, based on the closing price of the Common Stock
on the American Stock Exchange on December 12, 1997 was approximately 
$7,689,200.

Indicated below is the number of shares outstanding of each class of the
registrant's Common Stock, as of December 12, 1997.

Title of Each Class of Common Stock                        Number of Outstanding
Common Stock, $.03 par value                                     6,847,966










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                                     PART I

ITEM 1. BUSINESS.

OVERVIEW

Aurora Electronics, Inc. ("Aurora" or the "Company") provides spare parts
distribution and electronics recycling services to major personal computer
manufacturers and computer service organizations. Aurora operates worldwide
through its wholly-owned subsidiary, Aurora Electronics Group, Inc. ("AEG"),
with facilities in the United States, Canada, and Europe. AEG distributes new
and refurbished computer spare parts, primarily to the field service departments
of computer original equipment manufacturers ("OEMs"), third-party maintenance
and multivendor service organizations ("TPMOs" and "MVSOs", respectively)
computer resellers and dealers, and large corporate self-maintainers. AEG
distributes spare parts from over 500 manufacturers, with particular emphasis on
products from Apple Computer, AST Computer, AT&T, Compaq, Dell Computer, Digital
Equipment Corporation ("DEC"), Hewlett-Packard, IBM and Toshiba. In addition,
AEG provides a broad range of materials management services, such as advance
exchange, returned materials management, inventory management, and electronic
materials recycling and remarketing.

CAPITALIZATION

In March 1996, the Company completed a comprehensive recapitalization of the
Company (the "Recapitalization"). The Recapitalization included: (1) a tender
offer pursuant to which the Company repurchased approximately 4,268,000 shares
of $.03 par value common stock (the "Common Stock") at $2.875 per share; (2) the
Company's sale of $40 million of convertible preferred stock, $.01 par value per
share (the "Preferred Stock"), and $10 million in subordinated debt (with
approximately 607,000 shares of common stock attached) to partnerships managed
by Welsh, Carson, Anderson & Stowe ("WCAS"), affiliates of WCAS and certain
other purchasers; (3) the establishment of a new $35 million senior credit
facility with The Chase Manhattan Bank (formerly Chemical Bank, N.A.) (the
"Credit Agreement"); (4) the repayment in full of AEG's existing senior bank
indebtedness of approximately $26 million; and (5) the redemption of the
Company's 9-1/4% Senior Subordinated Notes (approximately $9.3 million). The
Preferred Stock is convertible into Common Stock at $2.125 per share, subject to
anti-dilution adjustments, and votes on an as-converted basis.

At June 30, 1996, and at various subsequent dates, AEG was not in compliance
with certain financial covenants under the Credit Agreement. To obtain waivers
of noncompliance from the lenders, on September 30, 1996, the Company, AEG and
WCAS (the Company's largest shareholder) entered into a Financial Support
Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed
$16,292,000, the total borrowings currently outstanding under the Credit
Agreement, and the Company has granted WCAS warrants to purchase 2,227,902
shares of Common Stock at prices ranging from $1.025 to $2.10 per share. The
Credit Agreement has been amended to waive all events of non-compliance with
financial covenants, to eliminate future financial covenants and to establish
the maturity date for the facility as April 30, 1999. At present, no additional
borrowings are available under the Credit Agreement.


INDUSTRY

The worldwide personal computer installed base has grown to approximately 180
million units, and requires a wide range of support, maintenance, upgrade and
recycling services. Due to the competitiveness of the personal computer industry
and the increasingly short manufacturing life cycle of the products, companies
involved in the manufacture, service and distribution of computers are seeking
outsourcing solutions to meet these requirements, preferably from a single
source. Aurora offers its customers a wide range of these critical aftermarket
services through integrated outsourcing programs provided on a worldwide basis,
thereby allowing its customers to achieve cost savings associated with reduced
inventories, lower headcount and less investment in plant and equipment.



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As a result of the trend toward outsourcing of support, maintenance, upgrade and
recycling activities, an independent spare parts distribution, recycling and
repair industry has emerged in support of personal computer manufacturers and
maintenance service providers. This industry is comprised of companies that are
unaffiliated with the manufacturers of computers and computer parts, yet possess
expertise in providing spare parts procurement, distribution, logistics, repair
and recycling services. Companies in this industry operate in the secondary
market for both new and used spare parts, relying on thousands of parts sourcing
contacts among system and subsystem manufacturers, distributors, brokers and
large end-users. Aurora is among the largest companies in the independent parts
distribution, recycling and repair industry.


SERVICES

The range of spare parts distribution, electronics recycling services and
aftermarket service programs which AEG provides includes:

     o   Spare Parts Distribution. AEG sources and distributes a wide range of
         spare parts, many of which are out-of-warranty and often
         out-of-production. AEG sources these parts either from its own
         inventory or by utilizing its parts sourcing database to locate and
         procure the parts, and then ships them to the customer, typically
         within 24 hours. Currently, approximately 70% of AEG's shipments are
         products that are sourced, reconditioned and tested the same day. AEG
         also works directly with computer OEMs and spare parts manufacturers as
         an authorized parts distributor, providing same and next-day shipment
         of new spare parts stocked by AEG on behalf of the OEM.

     o   Aurora Exchange Programs. AEG provides selected customers with good
         working parts at a discounted price in exchange for their defective
         parts. In most cases, the defective unit is repaired and placed back
         into inventory to fulfill future requests under this program.

     o   Asset Recovery and Re-marketing. AEG refurbishes, reconditions, and
         redistributes systems and subsystems received as a result of
         manufacturing fallout, field dispositions, dealer and distributor
         returns, stock rotations, excess and obsolete inventories and customer
         trade-in and exchange programs. Refurbished systems and subsystems are
         either utilized for AEG's spare parts inventories or redistributed
         worldwide.

     o   Returns Management Programs. AEG's returns management program assists
         OEMs and distributors by facilitating the return of units which are
         defective, returned due to buyer's remorse or stock rotation or
         otherwise removed from the marketplace. Returned units are received,
         processed, tested, refurbished, as required, and either returned to the
         manufacturer, sold in secondary channels or used for spare parts
         inventory.

     o   Parts Procurement Outsourcing. In some cases, customers are interested
         in total outsourcing of the parts ownership, management and logistics
         function. In these cases, AEG commits to certain service levels with
         respect to parts availability and response time, and takes
         responsibility for all aspects of the parts fulfillment process,
         including ownership of the part.

CUSTOMERS AND SUPPLIERS

AEG provides spare parts sourcing and distribution services primarily to five
groups of customers:

     o   Customer Maintenance Departments of Major Computer OEMs -- AEG provides
         spare parts and related repair, spare parts inventory management and
         logistics programs to support the customer maintenance departments of
         customers such as AT&T, Compaq, DEC, Hewlett-Packard, IBM and ICL.




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     o   Third-Party Maintenance Organizations and Multi-Vendor Service
         Organizations -- Customers in this category include not only
         independent field service organizations (DecisionOne, Entex, Granada,
         Sorbus, Vanstar), but also MVSOs of current or former computer OEMs
         (IBM, DEC, Hewlett-Packard, Data General, Unisys).

     o   Computer Resellers, Distributors and Dealers -- Major computer
         resellers, distributors and dealers are increasingly offering
         maintenance services to their customers as a means of capturing
         additional margin. AEG supports these organizations through parts
         sourcing and inventory remarketing programs. Typical customers include
         Circuit City, Compucom, Inacomp and Microage.

     o   Corporate Self-Maintainers -- An increasing number of large
         corporations are satisfying their internal service requirements through
         in-house organizations which meet their spare parts requirements
         through external suppliers such as AEG.

     o   Major Computer OEM's -- By using recycling services, OEM customers,
         such as Apple Computer, Compaq Computer, Dell Computer,
         Hewlett-Packard, IBM and Storage Technology, can reduce or eliminate
         the potential liability and expense related to disposing of excess,
         obsolete and defective products, while realizing an economic return on
         these products.

For fiscal 1997 and 1996, IBM accounted for approximately 11% and 19%,
respectively, of the Company's sales.

OPERATIONS

AEG services more than 5,000 customers worldwide, maintains a parts sourcing
database of over 8,000 contacts, and completes over 150,000 transactions
annually.

     o    Sales and Marketing. AEG believes that it is a market leader in terms
          of its approach to the sales and marketing of its materials management
          services, spare parts, and recycled parts, and its utilization of
          sophisticated information systems to support these efforts. AEG
          maintains an internal sales and customer support group of 76 employees
          which handles daily sales transactions involving spare parts and
          recycled product sales. In addition, AEG's materials management
          services are marketed through a direct sales force of 9 employees, who
          work closely with computer OEMs, TPMOs and MVSOs, and computer
          resellers in developing customized programs that meet their particular
          materials management requirements. Supporting these sales forces is a
          marketing department comprised of 9 employees who perform: (i)
          marketing communications; (ii) OEM and distributor relations; (iii)
          industry and competitive analysis; and (iv) development of new
          customer targets and new applications for AEG services.

     o    Purchasing. Because customers are often under severe time pressure in
          procuring spare parts, AEG's ability to confirm a customer request
          immediately from inventory, rather than initiating just-in-time
          procurement from its parts sourcing suppliers, increases the
          likelihood of completing a transaction. In order to increase the
          percentage of spare parts sourced directly from inventory, AEG
          maintains a department which procures a variety of commonly requested
          parts in advance and attempts to select parts from the recycle flow
          which can be sold as spares. AEG's information system regularly
          examines parts usage patterns and available stocks and performs
          trend-line analyses to assist this department in its procurement
          activities.

     o    Processing. AEG provides its spare parts distribution services
          primarily through distribution facilities in Marina del Rey,
          California; Toronto, Canada; and Hoofddorp, The Netherlands; and
          through its recycling facility in San Diego, California. AEG's
          distribution operations receive purchased spare parts or perform
          specific tear-down of whole systems in order to obtain spare parts,
          identify and cross-reference those parts for the AEG database, test
          and/or refurbish, as required, package, warehouse and ship. Often
          these activities must be performed within a 12 hour period in order to
          fulfill same-day requirements. AEG's recycling operations rely on the
          Company's ability to receive, identify, test, tear down as appropriate
          and


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          dispose of materials rapidly, in large volumes and consistent with
          customers' requirements. The Company's San Diego facility is ISO 9002
          certified. AEG has developed proprietary methods for recycling and
          reconditioning certain materials, particularly including integrated
          circuits (ICs), the purpose of which is to produce material that is of
          the highest value for either return to the recycling customer or
          resale. A key value to customers is the Company's ability to dispose
          of all unsalable materials in environmentally safe ways, thus
          minimizing such customers', and the Company's, environmental
          liability.

COMPETITION

The independent spare parts distribution and the electronic recycling services
industry is fragmented with widespread competition from a variety of small
independent suppliers. AEG believes that competition for OEM, TPMO and MVSO
customers is based on a number of factors, including: (i) breadth of parts
distributed; (ii) ability to offer sophisticated inventory and materials
management programs; (iii) ability to offer rapid delivery and sophisticated
logistics programs; and (iv) price. Among AEG's major independent competitors
are DecisionOne, Data Trend, PC Service Source, and The Cerplex Group.

PATENTS / TRADEMARKS

The Company does not currently hold any patents or registered trademarks.
However, the Company has developed several private labels for use in its
business, including PartSmart, Micro-C, Memory Master, MM, and Advantage. The
Company has applied for registration of "The PartSmart Company" trademark. While
management believes that this approach helps distinguish the Company to its
customers, none of these brand names is material to the continuation of the
business.

ENVIRONMENTAL REGULATION

The Company's business is subject to various federal, state and local
environmental laws and regulations relating to the disposal of waste material.
The Company believes that it is in compliance with such environmental laws and
regulations and is not aware of any situation or condition that could reasonably
be expected to have a material adverse affect on the Company's financial
condition or competitive position.

SEASONALITY

The Company does not consider its business to be seasonal.

EMPLOYEES

On December 20, 1997, the Company had approximately 260 employees. None of the
Company's employees is represented by a union and none are subject to a
collective bargaining agreement. The Company has never experienced a work
stoppage due to labor difficulties and believes that its employee relations are
good.

ITEM 2. PROPERTIES.

The following table sets forth certain information as of December 20, 1997
relating to the Company's principal properties, all of which are leased. The
Company believes that its properties are adequate and suitable for its current
needs.

<TABLE>
<CAPTION>
                                                                                              Approximate
LOCATION                               Principal Use                                       Square Footage
--------                               -------------                                       --------------
<S>                                    <C>                                                 <C>    
Marina del Rey, CA (1)                 Office, Warehouse and Service Facility                     106,715
San Diego, CA                          Office, Processing and Warehouse Facility                   56,808
                                       and Corporate Headquarters
Toronto, Canada                        Warehouse and Service Facility                               9,475
</TABLE>




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<TABLE>
<S>                                    <C>                                                 <C>    
Hoofddorp, Netherlands                 Warehouse and Service Facility                               8,945
Chicago, IL (2)                        Discontinued Operations                                    163,000
</TABLE>


(1)  The Company subleased 48,473 square feet of the Marina del Rey, California
     facility to an unrelated third party for a five year period, which
     commenced December 1, 1994.

(2)  The Chicago facility is subject to a sale/leaseback arrangement between the
     Company and an unrelated third party, as lessor. This property relates to a
     discontinued operation. See Note D of the Notes to Consolidated Financial
     Statements -- Discontinued Operations, and Note N of the Notes to
     Consolidated Financial Statements -- Commitments and Contingencies. The
     lease expires in 2005.

ITEM 3. LEGAL PROCEEDINGS.

The Company is engaged in routine legal proceedings incidental to its business,
none of which the Company believes will have a material adverse effect on the
financial position of the Company. See Note N of the Notes to Consolidated
Financial Statements -- Commitments and Contingencies.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

                                    PART II.


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Until December 12, 1997, the Company's Common Stock was traded on the American
Stock Exchange ("AMEX") under the symbol AUR. Commencing December 15, 1997, the
Company's Common Stock is reported on the OTC Bulletin Board under the symbol
AURU. The following table sets forth the range of the high and low sales prices
for the Common Stock for each quarterly period during the last two fiscal years.

<TABLE>
<CAPTION>
                                   FISCAL YEAR 1997             FISCAL YEAR 1996
                                   ----------------             ----------------
                              HIGH              LOW        HIGH             LOW
                              ----              ---        ----             ---
<S>                           <C>               <C>        <C>              <C>    
       First Quarter          2-3/8             1-1/2      3-1/4            1-3/4
       Second Quarter         2-3/16            1-3/8      2-15/16          1-1/2
       Third Quarter          2                 1-3/8      4-3/4            1-1/2
       Fourth Quarter         2-1/8               3/4      3-3/8            1-15/16
</TABLE>


On December 12, 1997, the last sale price of the Common Stock as reported by
AMEX was $ 1-1/4 per share. As of December 20, 1997, the Company had 1,020
holders of record of its Common Stock, and two (2) holders of warrants to
purchase up to 2,227,902 shares of its Common Stock at prices ranging from
$1.025 to $2.100 per share. See Note K of the Notes to Consolidated Financial
Statements -- Stockholders' Deficit.

The Company has not paid any cash or stock dividend on its Common Stock since
September 30, 1993. At present, it is the policy of the Company to retain all
earnings for reinvestment into the Company. In addition, the Credit Agreement
restricts AEG's ability to pay dividends to the Company, and thus limits the
Company's ability to pay dividends to its stockholders.

ITEM 6.   SELECTED FINANCIAL DATA.




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The following table sets forth selected financial data regarding the Company's
results of operations and financial position. This information should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and related notes included elsewhere herein.

<TABLE>
<CAPTION>
                                                          (In thousands, except per share figures)
                                      -----------------------------------------------------------------------------
        OPERATING DATA                     1997             1996             1995             1994             1993
        --------------                     ----             ----             ----             ----             ----
<S>                                   <C>              <C>              <C>              <C>              <C>      
 Net revenues                         $  64,892        $  98,019        $ 141,852        $ 120,386        $  58,328
 Gross profit                            12,986           24,443           34,582           26,350           11,274
 SG&A Expenses                           23,466           25,943           28,170           17,573            4,657
 Amortization of intangibles             34,044(1)        18,042(2)         9,073(3)         4,539(4)         1,284
 Restructuring charge and other              --               --            5,643(5)         2,161               --
 Litigation settlement                       --               --               --            1,943               --
 Operating income (loss)                (44,524)         (19,542)          (8,304)             134            5,333
Interest expense                         (4,050)          (6,221)          (5,522)          (4,449)          (1,276)
Other income (expense), net                (498)          (1,284)             116              197               --
 Earnings (loss) from continuing
           operations before taxes      (49,072)         (27,047)         (13,710)          (4,118)           2,505
 Net income (loss)                      (49,605)         (30,353)         (15,030)          (6,518)           3,005
 Earnings (loss) from continuing
           operations per share       $   (7.86)       $   (4.44)       $   (1.79)       $   (0.55)       $    0.40
 Net income (loss) per share          $   (7.86)       $   (4.44)       $   (1.79)       $   (0.87)       $    0.48
 Weighted average number of
           shares outstanding             6,675            7,159(6)         8,379            7,491            6,273
</TABLE>


(1)    During the fourth quarter of fiscal 1997, approximately $29,602 relating
       to a write-down of intangible assets acquired in fiscal 1994 in
       connection with the Century acquisition were charged to operations

(2)    During the fourth quarter of fiscal 1996, approximately $16,580 relating
       to a write-down of intangible assets acquired in fiscal 1992 in
       connection with the Micro-C Corporation acquisition was charged to
       operations.

(3)    During fiscal 1995, approximately $7,400 relating to a write-down of
       intangible assets associated with the repair business acquired in fiscal
       1993 in connection with the FRS, Inc. acquisition was charged to
       operations.

(4)    During fiscal 1994, approximately $2,400 relating to a write-down of
       intangible assets associated with a covenant not to compete was charged
       to operations.

(5)    During fiscal 1995, the Company substantially completed a major corporate
       reorganization into two core businesses operating through the IC
       recycling and recovery division and the spare parts distribution
       division.

(6)    In connection with the Recapitalization, on March 29, 1996, the Company
       repurchased approximately 4,268 shares of Common Stock and issued 607
       shares of Common Stock and 400 shares of Preferred Stock to WCAS and
       certain other purchasers. The Preferred Stock is convertible into 18,824
       shares of Common Stock.



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<TABLE>
<CAPTION>
                                                   As of September 30,
                               --------------------------------------------------------
      BALANCE SHEET DATA          1997         1996       1995        1994         1993
                                  ----         ----       ----        ----         ----
<S>                            <C>          <C>         <C>         <C>         <C>     
Working capital                $ (3,113)    $    610    $    196    $  9,013    $ 10,713
Total assets                     14,629       52,788      80,716     102,927      76,857
Long-term obligations (less
     current maturities)         36,585       25,842      46,183      51,761      25,904
Redeemable convertible
     preferred stock             46,722       40,000          --          --          --
Stockholder's equity (deficit)  (83,320)     (31,690)     12,338      26,903      26,655
</TABLE>



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS.
                    (In thousands, except per share figures)

OVERVIEW

Aurora, as it exists today, was formed on September 30, 1992. Prior to September
30, 1992, the corporation was known as BSN Corp. and was engaged in the sporting
goods industry. From 1990 through 1992, BSN divested itself of a majority of its
sporting goods assets and, effective September 30, 1992, announced that all of
its remaining sporting goods assets would be accounted for as discontinued
operations and that such operations would be sold. Effective September 30, 1992,
the Company entered the computer and electronics industry through the
acquisition of Micro-C Corporation, a San Diego, California based company
founded in 1985, which provided both integrated circuits ("IC") recycling
services to computer OEMs and memory IC distribution services for semiconductor
manufacturers. Effective September 30, 1993, Aurora acquired FRS, Inc., a
Sacramento, California based company founded in 1984, which provided depot
repair services to computer and peripheral OEMs. Effective March 1, 1994, Aurora
acquired Century Computer Marketing, a Marina del Rey, California based company
founded in 1984, a leading supplier of new and refurbished spare parts to the
computer maintenance market.

In the third quarter of fiscal 1995, the Company completed a corporate
reorganization, in which it: (a) exited the memory upgrade manufacturing and
supply business formerly known as the Premier Division; and (b) substantially
downsized its depot repair services operation acquired in the FRS, Inc.
acquisition, and refocused these operations to support the Company's remaining
spare parts distribution and electronic recycling services business.

In March 1996, the Company completed the Recapitalization. See Item 1. Business
-- Overview.

In October of 1997, the Company completed the sale of the remainder of its depot
repair services operation and sold its Irvine, Scotland recovery processing
facility. A reserve for the losses resulting from these transactions was accrued
in the fourth quarter of fiscal 1997.

RESULTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED
SEPTEMBER 30, 1996

Net revenues for the year ended September 30, 1997 for the Company were $64,892
as compared to $98,019 for the year ended September 30, 1997. Gross profit for
fiscal 1997 was $12,986 (20.0% of net revenues) as compared to gross profit for
fiscal 1996 of $24,443 (24.9% of net revenues). The Company's decline in
revenues and gross profit was due to a continued decline in the average sales
prices for DRAM memory chips in the Asset Recovery Services Division (ARS) and
an overall decline in the prices of computer repair parts in its Parts Services
Supply Division ("PSS").

Selling, General and Administrative ("SG&A") expenses for fiscal 1997 were
$23,466 (36.2% of revenue) as compared to $25,943 (26.5% of revenue) for fiscal


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<PAGE>   10

1996. Included in the 1996 SG&A expenses were approximately $725 in one time
charges related to the Recapitalization. The increase of the SG&A expenses as a
percentage of revenue was due to the reduction in revenues described in the
preceding paragraph.

Amortization expense for fiscal 1997 was $34,044 as compared with $18,042 in
fiscal 1996. The 1997 expense included $29,602 of unamortized goodwill and other
intangibles remaining from the acquisition of Century Computer Marketing and
$3,390 of computer system software and development costs in PSS. In
consideration of the continued decline in prices for computer repair parts,
management's projections do not support recovery of these assets over their
amortization lives. The fiscal 1996 amortization included the write-off of
$16,580 of goodwill related to the acquisition of Micro-C Corporation, Inc.

Net interest expense for fiscal 1997 was $4,050, or 6.2% of revenue, as compared
to $6,221, or 6.3% of revenue, for fiscal 1996. The interest expense for fiscal
1996 includes approximately $2,243 of charges related to the Recapitalization,
which includes approximately $1,070 of previously capitalized financed charges,
$917 of interest, fees and expenses due to the Company's previous lenders and
$256 relating to the 9-1/4% Senior Subordinated Notes.

Other expense for 1997 was $498, including a loss of approximately $450 from the
sales of its repair facility in Sacramento, California, and its asset recovery
facility in Irvine, Scotland. Other expense for fiscal 1996 was $1,284 including
writedowns and disposal of property and equipment totaling $1,369.

Provision for income taxes for fiscal 1997 was $533 as compared to $3,306 for
fiscal 1996. The fiscal 1997 provision includes the increase in the deferred
income tax valuation allowance in the amount  of $500 for deferred tax assets
not anticipated to be realized. The fiscal 1996 provision includes the increase
of the deferred income tax valuation allowance in the amount of $3,234 due to
management's determination that the deferred tax asset will not be fully
realized.

Net loss applicable to common stockholders for fiscal 1997 was $52,427 as
compared to $31,753 for fiscal 1996. The fiscal 1997 loss included dividends
on preferred stock of approximately $2,822, writedowns of information system
software and development costs of approximately $3,390, and the write-off of
goodwill from the Century acquisition of approximately $29,602.

RESULTS OF OPERATIONS - YEAR ENDED SEPTEMBER 30, 1996, COMPARED WITH YEAR ENDED
SEPTEMBER 30, 1995.

Net revenues for the year ended September 30, 1996 for the Company were $98,019
as compared to $141,852 for the year ended September 30, 1995. The Company's
decline in revenues was due primarily to the discontinuation of the Premier
Division ($36,254) during fiscal 1995. Excluding the Premier Division, net
revenues for fiscal 1996 decreased 7.2% over the comparable period in fiscal
1995. The decrease was due to a 27.4% decline in revenues in the IC recycling
and recovery business, offset by an increase of 5.3% in revenues for PSS. The
decline in revenues for ARS was due primarily to a decline during the year in
the average sales price for DRAM chips of approximately 87.0%.

Gross profit for fiscal 1996 was $24,443 (24.9% of net revenues) as compared to
gross profit for fiscal 1996 of $34,582 (24.4% of net revenues). The decrease in
gross profit was due primarily to the discontinuation of the Premier Division
and the decrease of approximately $6,261 for ARS over the comparable period in
fiscal 1995. This decline in gross profit was due to the decline of DRAM prices
discussed above.

SG&A expenses for fiscal 1996 were $25,943, (26.5% of revenue) as compared to
$28,170, (19.9% of revenue) for fiscal 1995. Included in the SG&A expenses were
approximately $725 in one time charges related to the Recapitalization. The
increase of the SG&A expenses as a percentage of revenue was due to the
reduction in revenues from the discontinuation of the Premier Division and the
decline in revenues for ARS.



                                       10
<PAGE>   11
Amortization expense for fiscal 1996 was $18,042 (18.4% of revenue), as compared
to $9,073, (6.4% of revenue) for fiscal 1995. The increase was due to the
write-off in the fourth quarter of fiscal 1996 of $16,580 of goodwill related to
the acquisition of Micro-C Corporation, which was only partially matched by the
third quarter of fiscal 1995 write-off of goodwill related to the acquisition of
FRS, Inc. Management wrote off the goodwill related to the Micro-C acquisition
due to the deterioration of the pricing levels in the IC market and their
negative effects on the Company's business prospects going forward.

Net interest expense for fiscal 1996 was $6,221, (6.3% of revenue) as compared
to $5,522 (3.9% of revenue) for fiscal 1995. The interest expense for 1996
includes approximately $2,243 of charges related to the Recapitalization which
includes approximately $1,070 of previously capitalized financed charges, $917
of interest, fees and expenses due to the Company's previous lenders and $256
relating to the 9-1/4% Senior Subordinated Notes.

Other income (expense) for fiscal 1996 included writedowns and disposal of
property and equipment totaling $(1,369).

Provision for income taxes for fiscal 1996 was $3,306 (3.4% of revenue) as
compared to $1,320 (.9% of revenue) for fiscal 1995. This provision includes the
increase of the deferred income tax valuation allowance in the amount of $3,234
due to management's determination that the deferred tax asset will not be fully
realized. Management reached this conclusion as a result of the limitation in
the utilization of the Company's net operating loss carryforwards caused by the
change of ownership pursuant to the Recapitalization.

Net loss applicable to common stockholders for fiscal 1996 was $31,753 as
compared to a net loss of $15,030 for fiscal 1995. The fiscal 1996 loss included
approximately $6,620 of charges incurred in the second quarter of fiscal 1996
due to the Recapitalization completed on March 29, 1996, $6,320 of reduced
operating income from the ARS when compared to 1995, dividends on preferred
stock of approximately $1,400, writedowns and disposal of property and equipment
totaling $1,369, and the write-off of goodwill from the Micro-C acquisition
totaling $16,580.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary requirements for capital are related to its accounts
receivable, inventory levels, improvements to its property and equipment,
investment in data processing equipment and software development, costs
resulting from the consolidation of its businesses and funding its losses from
operations. The Company's working capital was $(3,113) as of September 30,
1997, compared to $610 as of September 30, 1996.

At June 30, 1996, and at various subsequent dates, AEG was not in compliance
with certain financial covenants under the Credit Agreement. To obtain waivers
of noncompliance from the lenders, on September 30, 1996, the Company, AEG and
WCAS (the Company's largest shareholder) entered into a Financial Support
Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed
$16,292, the total borrowings currently outstanding under the Credit Agreement,
and the Company has granted WCAS warrants to purchase 2,228 Shares of Common
Stock at prices ranging from $1.025 to $2.10 per share. The Credit Agreement has
been amended to waive all events of non-compliance with financial covenants, to
eliminate future financial covenants and to establish the maturity date for the
facility as April 30, 1999. At present, no additional borrowings are available
under the Credit Agreement. See Note K of the Notes to Consolidated Financial
Statements -- Stockholders' Equity and Item 12 -- Security Ownership of Certain
Beneficial Owners and Management.

Subsequent to the Recapitalization on March 29, 1996, WCAS has provided
additional capital to the Company through purchases of Redeemable Convertible
Preferred Stock and a 10% Senior Subordinated Demand Note as follows:

<TABLE>
<S>                                                                       <C>
    August 14, 1997  Series B Redeemable Convertible Preferred Stock      $2,500
    October 2, 1997  Series C Redeemable Convertible Preferred Stock       2,500
    October 24, 1997 Series D Redeemable Convertible Preferred Stock       2,000
    December 2, 1997 10% Demand Promissory Note                            2,800
</TABLE>



                                       11
<PAGE>   12
Management believes that the Company will continue to experience operating
losses and negative cash flow in fiscal 1998 and does not have additional funds
available to it pursuant to the Credit Agreement. Since the Recapitalization,
WCAS has provided the Company financial support by loan guarantees, preferred
stock purchases and a direct loan. There can be no assurance that such
additional capital will be available to the Company. Absent continued financial
support of WCAS, it is unlikely that the Company can successfully implement its
1998 business plans and strategies. These matters raise substantial doubt about
the Company's ability to continue as a going concern. See Note A to the
Consolidated Financial Statements.


OUTLOOK AND UNCERTAINTIES

The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: The matters discussed in this Annual Report on
Form 10-K contain statements that constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
The words "expect," "estimate," "anticipate," "predict," "believe," and similar
expressions and variations thereof are intended to identify forward-looking
statements. Such statements appear in a number of places in this Annual Report
on Form 10-K and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect thereto,
among other things: (i) trends affecting the Company's financial condition or
results of operations; (ii) the Company's financing plans; and (iii) the
Company's business growth strategies. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. These risks and uncertainties include, but are not limited to, the
following:

        o     Other Uncertainties. Other operating, financial or legal risks or
              uncertainties are discussed in the Form 10-K or in the Company's
              other filings with the Commission from time to time in specific
              contexts. The Company is, of course, also subject to general
              economic risks, the risk of interruption in the source of supply,
              the risk of loss of a major customer and other risks and
              uncertainties.

       o      Market in Early Stages of Development. The Company believes that
              the market for its spare parts distribution and electronics
              recycling services is in the early stages of development and that
              awareness among certain potential customers of the availability of
              these services may be relatively low. Once customers are made
              aware of the availability of and benefits provided by these
              aftermarket support services, however, the Company's experience is
              that customers are generally receptive to making these services an
              important element of their manufacturing, post-sales support and
              environmental strategies. While the Company believes that it
              offers a mutually beneficial solution to large customers' and
              field service organizations' spare parts, recycling and asset
              recovery requirements, and has therefore targeted these entities
              as its primary potential customers, there is no assurance that
              these entities will choose to make use of these services, continue
              to outsource their spare parts, recycling and asset recovery
              needs, or choose not to become direct competitors of the Company.
              The Company addresses these issues in many ways, particularly
              including the development of information tools to use in its
              business, and the installation of information processing software.
              These projects require large budgets and manpower commitments, and
              have uncertain time schedules. Successful completion of these
              projects is not certain, and a failure of these projects may have
              adverse consequences for the development of the Company's business
              and/or its ability to successfully compete.

       o      Dependence on the Computer Industry. The Company's business is
              dependent upon the continued growth, viability and financial
              stability of its customers and potential customers in the computer
              industry. The computer industry has been characterized by rapid
              technological change, compressed product life cycles, and pricing
              and margin pressures. While these factors could be beneficial to
              the Company's business, such factors affecting segments of the
              computer industry in general, and the Company's customers in
              particular, could have an adverse effect on the Company's
              business.

       o      Inventory Obsolescence. The market for personal computers and
              subsystems is characterized by rapidly changing technology and
              frequent new product introductions. Innovations and improvements
              in computer and subsystem design, engineering and production may
              shorten the useful lives of existing systems and associated spare
              parts. Such rapid changes and improvements in technology, coupled
              with the need to maintain sufficient inventory levels of spare
              parts to ensure ready availability, subject the Company to the





                                       12
<PAGE>   13

              risk of inventory obsolescence. The Company has successfully
              reduced its exposure to such inventory obsolescence by maintaining
              rapid inventory turnover. There can be no assurance that the
              Company's efforts in this area will continue to be successful.

        o     Lack of Long-Term Supply Contracts. The Company's success is
              dependent on its ability to continue to sell spare parts to its
              customers and to attract a reliable stream of recyclable material
              from its customers. Generally, the Company distributes spare parts
              to, and receives its recyclable material from, customers pursuant
              to non-exclusive contracts that to do not contain guaranteed or
              minimum quantities and are subject to cancellation on short notice
              at the customer's discretion. There is no assurance that the
              Company's customers will continue to do business with the Company.
              The termination of a material contract or any substantial decrease
              in demand for spare parts or of the supply of recyclable material
              from significant customers could result in a significant decrease
              in the Company's sales.

        o     Dependence on Key Personnel. The success of the Company is
              dependent, in part, upon key management personnel. The loss of the
              services of any of the Company's key management personnel could
              have a material adverse effect on the Company. Expansion of the
              Company's business may require additional managers and employees
              with industry experience. Competition for skilled management
              personnel in the industry is intense.

        o     Competition. The independent spare parts distribution and the
              electronic recycling services industry is fragmented with
              widespread competition from a variety of small independent
              suppliers. The Company believes that competition for OEM, TPMO and
              MVSO customers is based on a number of factors, including: (i)
              breadth of parts distributed; (ii) ability to offer sophisticated
              inventory and materials management programs; (iii) ability to
              offer rapid delivery and sophisticated logistics programs; and
              (iv) price. Among the Company's major independent competitors are
              DecisionOne, Data Trend, PC Service Source, and The Cerplex Group.
              Certain of these competitors are larger in total company revenue
              or have larger capitalizations than the Company.

        o     Control by and Dependence on Major Shareholder. As discussed above
              under "Recapitalization," WCAS, and their affiliates, own
              approximately 79.5% of the Company's voting stock. As a result,
              WCAS is able to elect the entire Board of Directors, and will
              retain the voting power to control all matters requiring
              shareholder approval. The Company's ability to raise additional
              capital or to sell control of the Company to third parties depends
              on WCAS's approval. Absent continued financial support of WCAS, it
              is unlikely that the Company can successfully implement its 1998
              business plans and strategies. These matters raise substantial
              doubt about the Company's ability to continue as a going concern.
              See Note A to the Consolidated Financial Statements.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This
statement is effective for both interim and annual reporting periods ending
after December 15, 1997. SFAS No. 128 replaces primary EPS and basic EPS and
fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding. Diluted EPS is computed in the
same way as fully diluted EPS, except that the calculation now uses the average
share price for the reporting period to compute dilution from options under the
treasury stock method. Management does not believe that adoption of this
standard will have a significant impact on earnings per share.

In June 1997, FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB No. 130 and No. 131 are effective for fiscal years beginning
after December 15, 1997, with earlier adoption permitted. The Company does not
believe that adoption of these standards will have a material effect on the
Company. 

                                       13
<PAGE>   14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

<TABLE>
<CAPTION>
AURORA ELECTRONICS, INC. AND SUBSIDIARIES                                   PAGE
<S>                                                                         <C>
        Index to the Company's Financial Statements and Financial 
               Statement Schedules.

        Report of Independent Public Accountants                              15

        Consolidated Balance Sheets as of September 30, 1997 and 
              September 30, 1996.                                             16

        Consolidated Statements of Operations for the years ended 
              September 30, 1997, 1996 and 1995                               17

        Consolidated Statements of Stockholders' Equity (Deficit)
              for the years ended September 30, 1997, 1996 and 1995           18

        Consolidated Statements of Cash Flows for the years ended 
              September 30, 1997, 1996 and 1995                               19

        Notes to Consolidated Financial Statements                            20

        Schedule II--    Valuation and Qualifying Accounts for the 
              years ended September 30, 1997, 1996 and 1995                   31
</TABLE>

All other financial statement schedules are omitted as the required information
is presented in the financial statements or the notes thereto or is not
necessary.



                                       14
<PAGE>   15
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders of Aurora Electronics, Inc.:

We have audited the accompanying consolidated balance sheets of Aurora
Electronics, Inc. (a Delaware Corporation) and subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended September 30, 1997. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 Aurora Electronics,
Inc. and subsidiaries as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended September 30, 1997 in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has experienced declining
revenues, significant operating losses, has negative working capital and a
deficit in stockholders' equity. In addition, since a recapitalization of the
Company in March 1996, the Company has relied upon the financial support of its
largest shareholder for additional capital and to maintain its existing credit
facilities. The Company's losses are expected to continue for the foreseeable
future and the Company will require additional funding and financial support
from its largest shareholder or another third party. There can be no assurance
that such additional funding and financial support will be available on
acceptable terms, or that such funds, if available, would enable the Company to
continue operating. These matters 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 A. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.



                                                  ARTHUR ANDERSEN LLP


Orange County, California
January 12, 1998



                                       15
<PAGE>   16
                    AURORA ELECTRONICS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (in thousands)



<TABLE>
<CAPTION>
                                                                       September 30,
                                                                 ------------------------
                                                                    1997          1996
                                                                 ---------     ---------
<S>                                                              <C>           <C>      
                                  ASSETS
Current assets:
  Cash and cash equivalents                                      $     323     $   1,537
  Trade receivables, less allowance for doubtful accounts
     of $736 ($1,209 in 1996)                                        5,480         8,629
  Inventories                                                        3,389         4,098
  Deferred income taxes                                                 --           500
  Other current assets                                                 449           716
                                                                 ---------     ---------
Total current assets                                                 9,641        15,480

Property, plant and equipment, net                                   3,023         4,811
Intangible and other assets                                          1,965        32,497
                                                                 ---------     ---------
     Total assets                                                $  14,629     $  52,788
                                                                 =========     =========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Current portion of long-term debt                              $   1,177     $   1,974
  Accounts payable                                                   6,846         8,465
  Accrued compensation                                               1,904         1,912
  Accrued interest                                                     503           433
  Current portion of reserve for discontinued operations               702           702
  Other current liabilities                                          1,622         1,384
                                                                 ---------     ---------
Total current liabilities                                           12,754        14,870
Reserve for discontinued operations                                  1,888         2,366
Long-term debt                                                      36,585        25,842

Commitments and contingencies

Redeemable convertible preferred stock, 425,000 shares issued    
   (400,000 shares in 1996)                                         46,722        41,400
Stockholders' equity (deficit): 
  Preferred stock, 1,000 shares authorized, none issued                 --            --
  Common stock, 11,590 shares issued (10,486 shares in 1996)           348           315
  Additional paid-in capital                                        62,443        61,679
  Accumulated deficit                                             (129,472)      (77,045)
  Treasury stock, at cost, 4,743 shares                            (16,639)      (16,639)
                                                                 ---------     ---------
Total stockholders' equity (deficit)                               (83,320)      (31,690)
                                                                 ---------     ---------
     Total liabilities and stockholders' equity (deficit)        $  14,629     $  52,788
                                                                 =========     =========
</TABLE>


The accompanying notes are an integral part of these financial statements.




                                       16
<PAGE>   17
                    AURORA ELECTRONICS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE FIGURES)



<TABLE>
<CAPTION>
                                                                          Years ended September 30,
                                                                     -------------------------------------
                                                                        1997          1996         1995
                                                                     ---------     ---------     ---------
<S>                                                                  <C>           <C>           <C>      
Net revenues                                                         $  64,892     $  98,019     $ 141,852
Cost of sales                                                           51,906        73,576       107,270
                                                                     ---------     ---------     ---------
Gross profit                                                            12,986        24,443        34,582

Selling, general and administrative expenses                            23,466        25,943        28,170
Amortization of intangibles, including write-offs of $29,602,
   $16,580 and $7,407 in 1997, 1996 and 1995, respectively              34,044        18,042         9,073
Restructuring charges and other                                             --            --         5,643
                                                                     ---------     ---------     ---------
Operating loss                                                         (44,524)      (19,542)       (8,304)

Interest expense                                                        (4,050)       (6,221)       (5,522)

Other income (expense), net                                               (498)       (1,284)          116
                                                                     ---------     ---------     ---------
Loss from operations before provision for income taxes                 (49,072)      (27,047)      (13,710)
Provision for income taxes                                                 533         3,306         1,320
                                                                     ---------     ---------     ---------
Net loss                                                               (49,605)      (30,353)      (15,030)
Accrued dividends on preferred stock                                    (2,822)       (1,400)           --
                                                                     ---------     ---------     ---------
Net loss applicable to common stockholders                           $ (52,427)    $ (31,753)    $ (15,030)
                                                                     =========     =========     ========= 
Net loss applicable to common stockholders
   per share of common stock                                         $   (7.86)    $   (4.44)    $   (1.79)
                                                                     =========     =========     ========= 
Weighted average number of common and
   common equivalent shares                                              6,675         7,159         8,379
                                                                     =========     =========     =========
</TABLE>


The accompanying notes are an integral part of these financial statements.



                                       17
<PAGE>   18
                    AURORA ELECTRONICS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                    
                                                              COMMON STOCK         ADDITIONAL
                                                           ---------------------    PAID-IN   ACCUMULATED    TREASURY
                                                           SHARES      PAR VALUE    CAPITAL     DEFICIT        STOCK       TOTAL
                                                           ------      ---------    -------     -------        -----       -----
<S>                                                        <C>         <C>          <C>        <C>            <C>          <C>   
Balance at September 30, 1994                               8,020         $240      $61,827    $ (29,300)    $ (5,864)    $ 26,903

   Issuance of common stock/treasury stock -                       
      acquisitions                                             42            2         (240)        (353)         711          120
   Common stock to be issued - acquisitions                    --           --          345           --           --          345
   Net loss                                                    --           --           --      (15,030)          --      (15,030)
                                                           ------         ----      -------    ---------     --------     -------- 
Balances at September 30, 1995                              8,062          242       61,932      (44,683)      (5,153)      12,338

   Issuance of common stock/treasury stock - 
      acquisitions                                          1,476           45           66         (601)         771          281
   Issuance of common stock with notes payable                607           18        1,029           --           --        1,047
   Repurchase of common stock                                  --           --           --           --      (12,271)     (12,271)
   Issuance of common stock                                   340           10          903           (8)          14          919
   Financing costs from issuance of redeemable,
      convertible preferred stock                              --           --       (2,254)          --           --       (2,254)
   Accretion of dividends on redeemable,
      convertible preferred stock                              --           --           --       (1,400)          --       (1,400)
   Exercise of stock options                                    1           --            3           --           --            3
   Net loss                                                    --           --           --      (30,353)          --      (30,353)
                                                           ------         ----      -------    ---------     --------     -------- 
Balances at September 30, 1996                             10,486          315       61,679      (77,045)     (16,639)     (31,690)

   Issuance of common stock  - acquisitions                   235            7          380           --           --          387
   Issuance of common stock - employee bonuses                 94            3          151           --           --          154
   Issuance of common stock - litigation settlement           775           23          (23)          --           --           --
   Financing costs - warrants issued for guarantees
      on bank debt                                             --           --          256           --           --          256
   Accretion of dividends on redeemable, convertible
      preferred stock                                          --           --           --       (2,822)          --       (2,822)
   Net loss                                                    --           --           --      (49,605)          --      (49,605)
                                                           ------         ----      -------    ---------     --------     -------- 
Balances at September 30, 1997                             11,590         $348      $62,443    $(129,472)    $(16,639)    $(83,320)
                                                           ======         ====      =======    =========     ========     ======== 
</TABLE>


The accompanying notes are an integral part of these financial statements.



                                       18
<PAGE>   19
                    AURORA ELECTRONICS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)


<TABLE>
<CAPTION>
                                                                             Years ended September 30,
                                                                           1997          1996          1995
                                                                           ----          ----          ----
<S>                                                                      <C>           <C>          <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
     Loss from continuing operations                                     $(49,605)      $(30,353)    $(15,030)
       Adjustments to reconcile loss from continuing operations
       to net cash flows from operating activities:
         Depreciation and amortization                                     32,322         19,686       10,493
         Noncash interest expense                                           2,044          1,340          655
         Loss on disposition of assets                                      3,390          1,369          944
         Changes in assets and liabilities, net of acquisitions:
           Trade receivables, inventories and other assets                  4,227          7,133        6,667
           Accounts payable, accrued compensation and other liabilities    (1,389)          (729)      (1,789)
           Accrued interest and income taxes receivable/payable                70            632          (60)
           Deferred income taxes                                              500          3,234        1,304
                                                                         --------       --------     --------
     Net cash flows from continuing operations                             (8,441)         2,312        3,184
     Net cash flows from discontinued operations                             (478)        (1,005)        (951)
                                                                         --------       --------     --------
     Net cash flows from operating activities                              (8,919)         1,307        2,233
                                                                         --------       --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of property, plant and equipment                          (3,053)        (2,072)      (1,440)
                                                                         --------       --------     --------
     Proceeds from sales of marketable securities and SSG note                 --             --        1,171
                                                                         --------       --------     --------
     Net cash flows from investing activities                              (3,053)        (2,072)        (269)
                                                                         --------       --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments on debt                                                        (861)       (19,454)      (4,092)
     Issuance of preferred stock                                            2,500         37,747           --
     Purchases of treasury stock, net                                          --        (12,271)          --
     Advances under line of credit                                          9,663          7,486       12,070
     Repayments under line of credit                                         (544)       (11,287)     (11,400)
                                                                         --------       --------     --------
     Net cash flows from financing activities                              10,758          2,221       (3,422)
                                                                         --------       --------     --------
     Net change in cash and cash equivalents                               (1,214)         1,456       (1,458)

Cash and cash equivalents at beginning of period                            1,537             81        1,539
                                                                         --------       --------     --------
Cash and cash equivalents at end of period                               $    323       $  1,537     $     81
                                                                         ========       ========     ========
</TABLE>



The accompanying notes are an integral part of these financial statements.


                                       19
<PAGE>   20
                    AURORA ELECTRONICS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)


<TABLE>
<CAPTION>
                                                                           Years ended September 30,
                                                                            1997     1996      1995
                                                                            ----     -----     ----
<S>                                                                         <C>      <C>       <C>
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest                                                                   $1,907   $5,368    $4,157
                                                                           ======   ======    ======
Income taxes                                                               $   42   $   72    $   16
                                                                           ======   ======    ======
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
  AND FINANCIAL ACTIVITIES:

Payment of employment contract with issuance of                            $   --   $   --    $  119
                                                                           ======   ======    ======
Contingent shares issuable for additional acquisition costs                $   --   $   --    $  345
                                                                           ======   ======    ======
Reduction in 7% debt as a result of common stock sale                      $   --   $  956    $   --
                                                                           ======   ======    ======
Reduction in 9 1/4% debt as a result of issuance of Notes                  $   --   $8,593    $   --
                                                                           ======   ======    ======
Reduction in 7% debt as a result of indemnity claim settlement             $   --   $   --    $1,224
                                                                           ======   ======    ======
Issuance of common stock for employee bonuses                              $  154   $   --    $   --
                                                                           ======   ======    ======
</TABLE>


The accompanying notes are an integral part of these financial statements.



                                       20
<PAGE>   21

                    AURORA ELECTRONICS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In thousands, except per share figures)


NOTE A - CURRENT FINANCIAL CONDITION

During the years ended September 30, 1997, 1996 and 1995 the Company experienced
significant declines in revenues and increasing levels of operating losses. As a
result of these losses, at September 30, 1997 the Company has a deficit of
$83,320 in stockholders' equity and negative working capital of $3,113. In
addition, since a recapitalization of the Company in March 1996, the Company has
relied upon the financial support of its largest shareholder for additional
capital and to maintain its existing credit facilities. The Company's losses are
expected to continue for the foreseeable future and the Company will require
additional funding and financial support from its largest shareholder or another
third party. There can be no assurance that such additional funding and
financial support will be available on acceptable terms, or that such funds, if
available, would enable the Company to combine operating. These matters raise
substantial doubt about the Company's ability to continue as a going concern.

Management has made significant changes in its business to address its adverse
financial position. The remaining portion of its depot repair business has been
sold. In its asset recovery business, its Scotland facility has been sold and
its product selection is limiting its exposure to the price fluctuations in
integrated circuits and emphasizing system and sub-systems. In parts service,
the Company is implementing an internet-based, electronic sales and fulfillment
system which is expected to reduce inventory exposure, increase order fill
rates and be more cost efficient than the existing process. Management believes
that, when fully implemented, the new process will be a market advantage over
its competition.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization. Aurora Electronics, Inc. operates in one business segment
providing spare parts distribution and electronics recycling services to major
personal computer manufacturers and field service organizations.

Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of Aurora Electronics, Inc. (the "Company") and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.

Use of Estimates. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Company's industry is subject to significant
fluctuations in prices and technologies.

Cash and Cash Equivalents. The Company considers all liquid investments with a
maturity of three months or less at the date of purchase to be cash equivalents.

Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Reserves for cost in excess of
net realizable value are determined periodically by comparing sales prices and
volumes to cost and quantity of inventory on hand.

Property, Plant and Equipment. Property, plant and equipment is recorded at cost
and is depreciated over the estimated useful lives of the related assets by the
straight-line method for financial reporting purposes, and accelerated methods
with respect to certain assets for income tax purposes. Property, plant and
equipment includes computer hardware, software and implementation costs which
are purchased, acquired and modified for internal use. The Company's policy is
to capitalize and accumulate such costs as incurred and to commence amortization
when placed in service. Leasehold improvements are amortized over the terms of
the related leases or their useful lives, whichever is shorter.

Intangible Assets. Goodwill associated with the acquisition of MicroLine, Inc.
is amortized using the straight-line method over five years. Goodwill resulting
from prior acquisitions has been written off. (See Note G -- Intangible and
Other Assets.) The Company assesses the recoverability of its goodwill by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through projected non-discounted future cash flows over
the remaining amortization period. If projected future cash flows indicate that
unamortized goodwill will not be recovered, an adjustment is made to reduce the
net goodwill to an amount consistent with projected future cash flows discounted
at the Company's incremental borrowing rate. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.

Revenue Recognition. Revenue is recognized upon shipment of products to
customers. The Company warrants products against defects and has policies
permitting the return of products under certain circumstances. Provisions are
made for warranty costs and returns. Such costs generally have not been
material. The Company does not offer price protection to its customers. The
Company performs ongoing credit evaluations of its customers and has established
provisions for potential credit losses.

Earnings Per Share of Common Stock. Earnings per share of common stock is based
upon the weighted average number of common and common equivalent shares
outstanding, less cumulative dividends to holders of the Company's preferred
stock. Outstanding stock options and warrants are treated under the treasury

                                       21
<PAGE>   22
stock method as common stock equivalents when dilution results from their
assumed exercise. The Company's Redeemable Convertible Preferred Stock, 7-3/4%
Convertible Subordinated Debentures due April 15, 2001, and 7% Subordinated
Convertible Promissory Notes (the "7% Notes") due September 30, 1998, were not
common stock equivalents at the time of issuance and are therefore not included
in the calculation of primary earnings per share. Fully diluted net earnings per
share is not presented as it is anti-dilutive.

Stock-Based Compensation. In October 1995, the Financial Accounting Standards
Board issued SFAS 123 "Accounting for Stock Based Compensation." This standard,
if fully adopted, requires the accounting for employee stock-based compensation
using a fair value methodology. For stock options, fair value is determined
using an option pricing model that takes into account the stock price at the
date of grant, the exercise price, the expected life of the option, the
volatility of the underlying stock, the expected dividends and the risk-free
interest rate. For stock based compensation issued to non-employees, the
standard requires measurement based on the value of the related services
performed or the stock based compensation issued,whichever is more reliably
measurable.

The adoption of the accounting methodology of SFAS 123 related to employees is
optional and as permitted under SFAS 123, the Company intends to continue to
account for employee stock options using the Intrinsic value methodology in
accordance with APB Opinion No. 25; however, pro forma disclosure as if the
Company adopted the accounting methodology of SFAS 123 are required to be
presented.

New Accounting Standards. The Financial Accounting Standards Board (FASB) has
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." This statement is effective for both interim and annual reporting
periods ending after December 15, 1997. SFAS No. 128 replaces primary EPS and
basic EPS and fully diluted EPS with diluted EPS. Basic EPS is computed by
dividing reported earnings by weighted average shares outstanding. Diluted EPS
is computed in the same way as fully diluted EPS, except that the calculation
now uses the average share price for the reporting period to compute dilution
from options under the treasury stock method.

In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB No. 130 and No. 131 are effective for fiscal years beginning
after December 15, 1997, with earlier adoption permitted. 

The Company does not believe that adoption of these new standards will have a
material effect on the Company.

NOTE C - ACQUISITIONS

Micro-C Corporation ("Micro-C")

Effective September 30, 1992, the Company acquired all of the outstanding Common
Stock of Micro-C, a recycler of integrated circuits for the electronics
industry. The purchase price consisted of $10,949 in cash and the issuance of
the 7% Notes in the original principal amount of $7,379. Additionally, the
purchase agreement provided for the issuance of up to approximately 447 shares
of the Company's Common Stock valued at $11.20 per share (subject to
anti-dilution adjustments) to the sellers over a three year period commencing in
1993. In fiscal 1996, 1995 and 1994, the Company issued 82, 77 and 61 shares,
respectively in connection with the fiscal 1995, 1994 and 1993 operating
results. Pursuant to the terms of a settlement agreement, the remaining 227
shares will not be issued.

FRS, Inc. ("FRS")

On September 30, 1993, the Company acquired all of the outstanding Common Stock
of FRS, a provider of maintenance and repair services on selected computer
peripherals and products. FRS also provides inventory management control
services to certain manufacturers of electronic products and third party
maintenance organizations. Pursuant to the Merger Agreement, the total
consideration paid to the former shareholders of FRS was approximately $5,400
comprised of cash of approximately $100 and 744 shares of the Company's Common
Stock valued at $7.125 per share (the last closing share price of Aurora's
Common Stock prior to signing the Merger Agreement on September 12, 1993).

Century Computer Marketing ("Century")

Effective March 1, 1994, the Company acquired substantially all of the assets
and assumed substantially all of the liabilities of Century. Century is a
distributor of new and refurbished spare parts to the computer maintenance
market, supporting the products of over 500 manufacturers. Pursuant to the terms
of the Asset Purchase Agreement, the total consideration paid to Century was
approximately $29,000 in cash, $2,000 in Common Stock of the Company and an
additional $2,700 in Common Stock of the Company. The Company financed the
acquisition of Century with proceeds from a five year $25,000 senior term loan
and internally generated cash.


MicroLine, Inc.

Effective March 31, 1997, the Company acquired MicroLine, Inc. the developer and
operator of PowerSource On-line, an internet-based information service that
matches computer parts buyers to available inventories from distributors that
participate in the on-line parts data base of PowerSource. The consideration to
the former shareholders of MicroLine was 235,116 shares of common stock of the
Company. The business now operates as the PowerSource Division of AEG.

All acquisitions have been accounted for by the purchase method of accounting,
and accordingly each purchase price has been allocated to the assets acquired
and the liabilities assumed based on the estimated fair values at the date of
the acquisitions. The excess of the purchase price over the estimated fair
values of the net assets acquired was recorded as goodwill amortizable over 40
years, or 5 years for MicroLine. 


                                      22
<PAGE>   23
Goodwill from the Micro-C, FRS and Century acquisitions has been written off.
See Note G -- Intangibles and Other Assets.

The estimated fair value of assets and liabilities as of the date of the
acquisition of MicroLine is summarized as follows:


<TABLE>
<CAPTION>
                          MicroLine
                          ---------
<S>                        <C>  
Current asset              $  78
Machinery and equipment       21
Other assets                   3
Goodwill                     496
Liabilities                 (211)
                           -----
                           $ 387
                           =====
</TABLE>

NOTE D - DISCONTINUED OPERATIONS

Commencing in 1990, the Company began to discontinue its sporting goods
operations and divest itself of the related assets. Effective September 30,
1992, the Company announced that its remaining sporting goods operations would
be accounted for as discontinued operations and the remaining assets would be
sold. As of September 30, 1994, no material assets remained related to the
discontinued operations. Obligations and contingencies relating to discontinued
operations consists primarily of a leased building. (See Note N of the Notes to
Consolidated Financial Statements -- Commitments and Contingencies).

NOTE E - INVENTORIES

Inventories at September 30, 1997 and 1996 consisted of the following:


<TABLE>
<CAPTION>
                                   1997             1996
                                   ----             ----
<S>                            <C>              <C>     
Spare and repair parts         $    377         $    395
Work in process                      94               59
Finished goods                    2,918            3,644
                               --------         --------
     Total inventories         $  3,389         $  4,098
                               ========         ========
</TABLE>


NOTE F - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at September 30, 1997 and 1996 consisted of the
following:


<TABLE>
<CAPTION>
                                                     Estimated Life         1997       1996
                                                     --------------         ----       ----
<S>                                                    <C>                <C>        <C>    
Furniture, fixtures and equipment                      3 - 5 year         $ 6,707    $ 7,150
Leasehold improvements                                 1 - 5 years          1,112        949
                                                                          -------    -------
                                                                            7,819      8,099
Less accumulated depreciation and amortization                             (4,796)    (3,288)
                                                                          -------    -------
Total property, plant and equipment                                       $ 3,023    $ 4,811
                                                                          =======    =======
</TABLE>


The Company leases office, processing and warehousing facilities under various
operating leases through 2002. Future minimum lease payments under
non-cancelable operating leases with remaining terms in excess of one year for
the fiscal year ending September 30 are as follows: 1998 - $988; 1999 - $941;
2000 - $539; 2001 - $58. Rent expense was approximately $1,531, $1,246, and
$1,662 for the years ended September 30, 1997, 1996 and 1995, respectively.

In connection with changes in the Parts Services Division (formerly Century),
the Company charged $3,390 of capitalized information systems software and
development costs to operations in the fourth quarter of fiscal 1997. (See Note
G -- Intangibles and Other Assets).

                                       23

<PAGE>   24

NOTE G - INTANGIBLES AND OTHER ASSETS

Intangibles and other assets at September 30, 1997 and 1996 consisted of the
following:

<TABLE>
<CAPTION>
                                   1997          1996
                                   ----          ----
<S>                              <C>          <C>     
Goodwill                         $    496     $ 31,730
Database valuation                     --        1,462
Debt issuance costs                 1,741        1,485
Other                                 518          620
Less accumulated amortization        (790)      (2,800)
                                 --------     --------
                                 $  1,965     $ 32,497
                                 ========     ========
</TABLE>


In fiscal 1997, due to continuing declines in the prices for replacement and
repair parts, the Parts Services Division (formerly Century) experienced a
continued decrease in inventory values and increasing levels of operating
losses. As a result management decided to reorganize its parts business to
reduce inventory exposure and to more cost effectively deliver parts to its
customers. The plan is to utilize the internet-based electronic processing
technology acquired in the MicroLine acquisition (see Note C -- Acquisitions) to
replace its inventory and labor intensive operating methods. As a result,
management charged the remaining balance of goodwill and the database valuation
resulting from the acquisition of Century, aggregating $29,602, to operations in
the fourth quarter of fiscal 1997. These charges were determined necessary as
management estimated that the amortization of the respective intangible balances
over their remaining lives would not be recovered through the projected
non-discounted future cash flows over their respective remaining amortization
periods. Also, the new internet technology made obsolete much of the Company's
capitalized information systems software and development cost and, therefore,
$3,390 of formerly capitalized costs were charged to operations in the fourth
quarter of fiscal 1997.

Due to the deterioration of the pricing levels in the integrated circuit market
in the latter part of fiscal 1996 and their related negative effects on the
Company's business prospects, management charged the remaining balance of
goodwill related to the acquisition of Micro-C, totaling $16,580, to operations
in the fourth quarter of fiscal 1996. Also, upon the completion of a major
corporate reorganization in the third quarter of fiscal 1995, management charged
the remaining balance of goodwill related to the acquisition of FRS, totaling
$7,407, to operations in fiscal 1995. These charges were determined necessary as
management estimated that the amortization of the respective goodwill balances
over their remaining lives would not be recovered through the projected
non-discounted future cash flows over their respective remaining amortization
periods. Other reductions of goodwill related to the reduction of the notes
payable due to the sellers of Micro-C as a result of a favorable arbitration
award in April 1995. (See Note H -- Long-term Debt.)

NOTE H - LONG-TERM DEBT

Long-term debt at September 30, 1997 and 1996 consists of the following:


                                       24
<PAGE>   25

<TABLE>
<CAPTION>
                                                  1997         1996
                                                --------     --------
<S>                                             <C>          <C>     
Revolving line of credit                        $ 16,292     $  6,342
10% Senior subordinated notes                      9,727        9,043
7-3/4% Convertible subordinated debentures        10,353       10,326
7% Subordinated convertible promissory notes         883        1,692
Capital lease financing                              507          413
                                                --------     --------
Total long-term debt                              37,762       27,816
Less current portion of long-term debt            (1,177)      (1,974)
                                                --------     --------
                                                $ 36,585     $ 25,842
                                                ========     ========
</TABLE>


Bank Financing

In March 1996, in conjunction with the recapitalization of the Company
("Recapitalization"), the Company's operating subsidiary, Aurora Electronics
Group, Inc. ("AEG"), entered into a Credit Agreement with a group of lenders
which provided for up to $35,000 of borrowings for working capital and for
approved acquisitions. Borrowings under the Credit Agreement are secured by
substantially all of the assets of AEG. The term of the Credit Agreement was
originally five years. The interest rate is based on LIBOR plus 2.75% or the
Bank's Base Rate plus 1.25%, with interest rate adjustments based on the ratio
of total funded senior debt to the Company's earnings before interest, taxes,
amortization and depreciation.

At June 30, 1996, and at various subsequent dates, AEG was not in compliance
with certain financial covenants under the Credit Agreement. To obtain waivers
of noncompliance from the lenders, on September 30, 1996, the Company, AEG and
WCAS (the Company's largest shareholder) entered into a Financial Support
Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed
$16,292, the total borrowings currently outstanding under the Credit Agreement,
and the Company has granted WCAS warrants to purchase 2,228 Common Shares at
prices ranging from $1.025 to $2.10 per share. At September 30, 1997 the Credit
Agreement has been amended to waive all events of non-compliance with financial
covenants, to eliminate future financial covenants and to establish the maturity
date for the facility as April 30, 1999. At present, no additional borrowings 
are available under the Credit Agreement.

10% Senior Subordinated Notes

In connection with the Recapitalization, the Company issued 10% Notes to its
largest shareholder with a face value of $10 million due September 30, 2001. The
Notes are shown net of the value of 607 shares of common stock issued
simultaneously with the Notes which is reflected as a discount to the related
debt. The discount is being amortized through the maturity date of the 10%
Notes. Interest on the Notes is payable on March 31 and September 30 of each
year beginning September 30, 1996 through maturity. Unpaid interest totaling
$500 was added to the principal balance of the Notes in the fourth quarter of
fiscal 1997, pursuant to the terms of the Notes. The proceeds of the Notes were
used to repay the 9-1/4% Senior Subordinated Notes due November 1996. (See Note
K of the Notes to Consolidated Financial Statements -- Stockholders' Equity.)

7-3/4% Convertible Subordinated Debentures

The 7-3/4% Convertible Subordinated Debentures mature April 15, 2001
("Convertible Debentures") and are shown net of unamortized discount of
approximately $98 and $125 at September 30, 1997 and 1996, respectively. The
Company is required to make partial sinking fund payments of approximately $117
and $2,516 in 1999 and 2000, respectively. The Convertible Debentures are
convertible into Common Stock of the Company at a conversion price, subject to
adjustment in certain instances, of $11.66 per share, and are redeemable at the
option of the Company at face value plus accrued interest thereon. Interest on
the 7-3/4% Debentures is payable on April 14 and October 14 of each year through
maturity.

7% Subordinated Convertible Promissory Notes

In connection with the acquisition of Micro-C, the Company issued 7% Notes to
the sellers aggregating approximately $7,379. In April 1995, the Company was


                                       25
<PAGE>   26

awarded in arbitration a final settlement which reduced the outstanding balance
of the notes to $2,648. Interest on the 7% Notes is payable on March 31 and
September 30 of each year beginning March 31, 1993 through maturity. The
remaining principal balance of the 7% Notes is due in monthly installments
totaling $74 beginning September 30, 1996 through September 30, 1998. The 7%
Notes are convertible into shares of the Company's Common Stock at a rate of
$11.20 per share, subject to certain adjustments as defined in the note
agreements.

Subsequent to September 30, 1997, the Company borrowed $2,800 from its largest 
shareholder under the terms of a 10% Demand Promissory Note.

Other Long-term Debt

Additional long-term debt consists primarily of secured equipment financing and
capital lease obligations with interest rates ranging from 8.9% to 12.9%, due in
monthly installments through 1999.

Aggregate maturities of long-term debt for the fiscal years ending September 30
are as follows:, 1998 - $1,177, 1999 - $16,586, 2000 - $2,553 and 2001 -
$17,447.

NOTE I - INCOME TAXES

The provision for income taxes consists of the following:


<TABLE>
<CAPTION>
                                                                 For the years ended September 30,
                                                                 1997       1996       1995
<S>                                                            <C>       <C>          <C>     
Current provision (benefit) - Federal                          $      -  $        -   $      -
                                                               --------   ---------   --------
                            - State
  Total current provision                                             -           -          -
                                                               --------   ---------   --------

Deferred provision (benefit):
  Net operating loss generated                                   (4,229)     (4,895)    (3,193)
  Net reversal of non-deductible accruals and reserves            1,358         768        213
  Reserve method for allowances for doubtful accounts               230          83       (146)
  Depreciation                                                   (1,774)      1,467        276
  Goodwill amortization                                          (9,689)        532        616
  Deferred benefits not currently recognized                     14,104       2,045      2,234
  Increase in non-utilization of deferred tax asset due
       uncertainty of recovery                                      500       3,234      1,304
  Other                                                              33          72         16
                                                               --------   ---------   --------
       Total deferred provision                                     533       3,306      1,320
                                                               --------   ---------   --------
       Total federal income tax provision                      $    533   $   3,306   $  1,320
                                                               ========   =========   ========
</TABLE>


The provision (benefit) for income taxes in the accompanying consolidated
statements of operations differs from the amount of tax based on the statutory
federal income tax rate as follows:



                                       26
<PAGE>   27

<TABLE>
<CAPTION>
                                                           For the years ended September 30,
                                                             1997        1996        1995
                                                             ----        ----        ----
<S>                                                       <C>          <C>         <C>  
Provision (benefits) for income taxes at statutory rate   $(16,684)    $(9,196)    $(4,661)
Nondeductible expenses                                          30       5,794       3,227
Deferred benefit not currently recognized                    3,860       2,045       2,234
Permanent effect of book/tax adjustments                    14,104       1,747          --
Increase in non-utilization of deferred tax asset due               
      to uncertainty                                           500       3,234       1,304
State taxes, net of federal benefit                         (1,310)       (614)       (823)
Other                                                           33         296          39
                                                          --------     -------     -------
     Total provision for income taxes                     $    533     $ 3,306     $ 1,320
                                                          --------     -------     -------
</TABLE>


The components of the Company's deferred income tax benefit are as follows:

<TABLE>
<CAPTION>
                                                 as of September 30,
                                                 1997          1996
                                                ------       --------
<S>                                             <C>           <C>     
Reserves for discontinued operations           $  1,040       $  1,232
Allowance for doubtful accounts and notes           410            640
Inventory reserves                                  374            318
Nondeductible accruals                              899          1,102
Valuation allowance - current                    (2,723)        (2,792)
                                               --------      ---------
     Current deferred income tax benefit             --            500
                                               --------      ---------  
Depreciation                                        659         (1,115)
Net operating loss carryforwards - long-term     18,381         14,152
Capital loss carryback                            2,084          3,218
Tax credits                                         273            158
Goodwill amortization                             8,541         (1,148)
Valuation allowance - long-term                 (29,938)       (15,265)
                                               --------      ---------
     Long-term deferred income tax benefit           --             --
                                               --------      ---------
                                               $     --      $     500
                                               ========      =========
</TABLE>


At September 30, 1997, the Company had tax basis net operating losses ("NOLs")
of approximately $54,513 available to offset future ordinary taxable income. The
utilization of the Company's NOLs will be substantially limited due to the
Recapitalization. These carryforwards begin to expire during 2007. The income
tax benefit related to these NOLs, as well as to certain reserves recorded by
the Company, have been reflected in the deferred income tax asset accounts to
the extent they are considered realizable.

The Company has established a valuation allowance for the entire deferred tax
asset because it is not likely to be realized in the foreseeable future.

NOTE J - REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company has issued, in series, Redeemable Convertible Preferred Stock (the
"Shares"), primarily to its largest shareholder. The Shares have a par value of
$.01 per share and were issued for $100 per share. The Shares have a liquidation
preference of $100 per share plus accrued and unpaid dividends. Dividends accrue
at 7% per annum. The Shares (including all unpaid dividends) are convertible
into common stock of the Company and are subject to mandatory redemption by the
Company on September 30, 2006 at the price of $100 per share plus all 


                                       27

<PAGE>   28

accrued and unpaid dividends to the redemption date. The holders of the Shares
have voting rights equivalent to the holders of Common Stock on an "as
converted" basis. The issues were:

         Series A - 400 shares issued concurrent with the Recapitalization with
         a current conversion price of $1.91 as adjusted for anti-dilution
         adjustments.

         Series B - 25 shares issued August 14, 1997 with a current conversion
         price of $1.37 as adjusted for anti-dilution adjustments.

Subsequent to September 30, 1997, the Company issued an additional 45 shares to
its largest shareholder.

NOTE K - STOCKHOLDERS' EQUITY

The Company has 1,000 shares of authorized $.01 par value preferred stock, with
none issued or outstanding. The Company has 50,000 shares of authorized $.03 par
value Common Stock with 11,590 shares issued and 6,847 shares outstanding at
September 30, 1997, (compared to 10,486 and 5,743, respectively, at September
30, 1996).

In October 1995, the Company sold 340 shares of Common Stock to investors in a
private placement of equity securities in exchange for proceeds totaling $883,
net of issuance costs. Proceeds from the offering were used to make the
principal payment due September 30, 1996 on the 7% notes payable.

In March 1996, the Company completed a comprehensive Recapitalization of the
Company, pursuant to which the Company (a) sold (i) 400 shares of Redeemable
Convertible Preferred Stock, $.01 par value, to WCAS and certain other investors
for an aggregate purchase price of $40,000 and (ii) 607 shares of Common Stock,
along with a $10,000 10% Senior Subordinated Note due September 2001, to WCAS
Capital Partners II, L.P. ("WCAS CP II") for an aggregate purchase price of
$10,000, and (b) repurchased 4,268 shares of the Company's Common Stock at
$2.875 per share pursuant to a tender offer for up to 6,500 shares of Common
Stock.

In consideration for WCAS guaranteeing borrowings under the AEG senior secured
revolving credit facility, the Company has granted WCAS warrants to purchase
2,228 Common Shares at prices ranging from $2.10 to $1.025 per share. See Note H
- Long-term Debt.

In connection with AEG's prior Senior Credit Agreement dated May 1994, and the
Third Amendment effective September 30, 1995 which was repaid in full as part of
the Recapitalization, the Company issued Warrants to the lenders to acquire 397
shares of common stock at $2.18 per share.

NOTE L - EMPLOYEE STOCK AND SAVINGS PLANS

Employee stock purchase plan. Effective October 1, 1994, the Company established
an employee stock purchase plan for all eligible employees. Under the plan,
shares of the Company's Common Stock may be purchased at three-month intervals
at 85% of the lower of the fair market value on the first or the last day of
each three-month period. Employees may purchase shares having a value not
exceeding 15% of their gross compensation during an offering period.

Savings plan. The Company has a savings plan, which qualifies under Section
401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 15% of their pretax salary, but not more than
statutory limits. The Company contributes a discretionary amount, set by the
Board of Directors, for each dollar contributed by a participant, with a maximum
of 6% of participant earnings. The Company's matching contribution to the
savings plan was $207, $252, and $279 for the years ended September 30, 1997,
1996 and 1995, respectively.

Stock option plan. The Company has a stock option plan for directors, officers,
and key employees which provides for incentive and nonqualified stock options. A
committee comprised of disinterested directors determines the option price (not
less than the fair market value of the stock at the date of grant). The options
generally expire ten years from the date of grant and generally vest over four
years. As of September 30, 1997, options for 4,420 shares were issued and 988
shares were available for future grants under the plan. Options for 200 shares 


                                       28

<PAGE>   29

were issued outside the Stock Option Plan. The new stock option plan was
instituted at the time of the Recapitalization. At that time, the Company
offered to exchange options issued under prior stock option plans for options
under the new plan at the market price per share at the time of the
Recapitalization ($2.125).

The Company accounts for its stock option plans under APB Opinion No. 25, under
which no compensation cost has been recognized. The following pro forma
disclosures represent what the Company's net income and earnings per share
would have been had the Company recorded compensation cost for these plans in
accordance with the provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation." (SFAS No. 123).

<TABLE>
<CAPTION>
                                                     1997           1996
                                                   --------       --------
<S>                                                <C>           <C>
Pro forma net loss applicable
  to common stockholders ......................    $(53,497)      $(32,231)
Pro forma EPS .................................    $  (8.01)      $  (4.50)
</TABLE>


Because the method of accounting required under Statement No. 123 has not been
applied to options granted prior to October 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. 

<TABLE>
<CAPTION>
                                            Outstanding Options
                                    -------------------------------------------
                                       Shares
                                    (in thousands)       Range of Option Prices
                                    --------------       ----------------------
<S>                                 <C>                      <C>     <C>  
Outstanding at September 30, 1994       967                 $6.00 - $12.00   
Granted                               1,130                  3.38 -   4.50
Forfeited                              (953)                 7.00 -   8.13
                                     ------                 -----   ------
Outstanding at September 30, 1995     1,144                  3.38 -  11.75
Granted                               4,901                  2.13 -   4.19
Exercised                                (1)                 2.13
Forfeited                            (2,013)                 3.38 -  11.75
                                     ------                 -----   ------
Outstanding at September 30, 1996     4,031                  2.13 -  11.75
Granted                               1,658                  1.00 -   1.75
Forfeited                            (1,269)                 2.13
                                     ------                 -----   ------
Outstanding at September 30, 1997     4,420                 $1.00 - $12.00
                                     ======                 =====   ======
</TABLE>

The weighted-average grant-date fair value of options granted during fiscal
1997 and 1996 was $1.18 and $1.67, respectively.

The 4,420 shares under the 1996 plan outstanding at September 30, 1997 and 1996
have a weighted average exercise price of $1.93 and $2.39, respectively.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997 and 1996, respectively: risk-free interest
rates of 6.5% and 6.6%; no expected dividend yield; expected lives of 4 years;
expected volatility of 117% in both years.







                                       29

<PAGE>   30
Pursuant to a Tax Indemnity Agreement entered into between the Company and Sport
Supply Group, Inc. ("SSG") in connection with the SSG Public Offering, the
Company agreed to indemnify SSG against certain consolidated income tax
liabilities of the Company incurred prior to the SSG Public Offering. The
Company does not believe that amounts paid, if any, pursuant to these agreements
will have a material effect on the results of operations and financial condition
of the Company.

Class Action Settlement

In connection with the settlement of a class action complaint, the parties
reached agreement on the terms of a settlement, which required the Company to
contribute $250 in cash and $1,250 in Common Stock priced at the issuance date.
The balance of the settlement ($1,500 in cash) was funded by the Company's
insurer. The settlement was approved on September 5, 1995. In fiscal 1997, the
Company issued 775 shares of its Common Stock in final settlement of this
action.

NOTE O - EXPORT SALES AND MAJOR CUSTOMERS

Export sales to customers in foreign countries amounted to approximately 
$16,244, $21,192, and $28,032 in fiscal 1997, 1996 and 1995, respectively.
Revenues from the Company's foreign operations approximated $9,905, $9,278, and
$10,109 in 1997, 1996 and 1995, respectively. In fiscal 1997 one customer
accounted for approximately 11% of net revenues. One customer accounted for 19%
percent or more of net revenues in fiscal 1996 and no customer accounted for
more than 10% of net revenues in 1995.



                                       30
<PAGE>   31
SCHEDULE II

                    AURORA ELECTRONICS, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

                             (amounts in thousands)

<TABLE>
<CAPTION>
                                                             Additions
                                          Balance at    Charged to   Charged to
                                        beginning of    costs and      other                    Balance at end
                                          period        expenses      accounts    Deductions     of period
                                          ------        --------      --------    ----------    --------------
<S>                                      <C>             <C>          <C>         <C>           <C>
FOR THE YEAR ENDED SEPTEMBER 30, 1997

  Allowance for doubtful accounts        $1,209          $  372       $ --      $    845(1)       $  736
                                         ======          ======       ====      ========          ======

  Reserve for discontinued operations    $3,068          $   --       $ --      $    478          $2,590
                                         ======          ======       ====      ========          ======

FOR THE YEAR ENDED SEPTEMBER 30, 1996                                                           
                                                                                                
  Allowance for doubtful accounts        $1,414          $  410       $ --      $    615(1)       $1,209
                                         ======          ======       ====      ========          ======
                                                                                                
  Reserve for discontinued operations    $4,073          $   --       $ --      $  1,005          $3,068
                                         ======          ======       ====      ========          ======
FOR THE YEAR ENDED SEPTEMBER 30, 1995                                                           

  Allowance for doubtful accounts        $1,046          $  857       $ --      $    489(1)       $1,414
                                         ======          ======       ====      ========          ======
                                                                                                
                                                                                                
  Reserve for discontinued operations    $5,024          $   --       $ --      $    951          $4,073
                                         ------          ------       ----      --------          ------
</TABLE>


(1)  Uncollectible accounts written off, net of recoveries.



                                       31
<PAGE>   32

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

                                      None.


                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The directors and executive officers of the Company as of December 20, 1997 were
as follows:

<TABLE>
<CAPTION>
NAME                     AGE     PRESENT POSITION                                               SINCE
----                     ---     ----------------                                               -----
<S>                      <C>                                                                     <C> 
Jim C. Cowart            46      Chairman of the Board                                           1992
Harvey B. Cash           59      Director                                                        1993
David A. Lahar           40      Director                                                        1992
Thomas E. McInerney      56      Director                                                        1996
Richard H. Stowe         54      Director                                                        1996
John F. Thompson         55      President and Chief Executive Officer                           1997
Amir Asadi               39      Vice President - Information Systems                            1996
Eric Augusta             52      Vice President - Strategic Planning                             1994
James N. Contardi        34      Senior Vice President & General Manager - Parts Services        1997
George M. Korchinsky     56      Senior Vice President & Managing Director -                     1996
                                   European Operations
Thomas M. Peck           34      Senior Vice President & General Manager -                       1997
                                   PowerSource Division
James Stameson           39      Senior Vice President & General Manager -                       1997
                                   Asset Recovery Services
F. Wayne Withers         62      Senior Vice President & Chief Financial Officer                 1997
</TABLE>


JIM C. COWART, since December 31, 1992, has served as the Chairman of the Board
and until October 1997 as Chief Executive Officer, and formerly served as Vice
President of Strategic Development of the Company. Since February 1992, Mr.
Cowart has served as Chairman of EOS Capital, Inc., a private capital firm which
has been, from time to time, retained by the Company. Mr. Cowart is also a
director of B/E Aerospace, Inc. ("BEAV" - NASD), a leading manufacturer of
aircraft cabin interior products. Mr. Cowart has been a director of the Company
since October 1992. Mr. Cowart and Mr. Cash are first cousins.

HARVEY B. CASH, from June 1985 to present, has been a general partner of
InterWest Partners III, and from June 1989 to present, Mr. Cash has been a
general partner of InterWest Partners IV, both of which are venture capital
firms. Mr. Cash, since December 1983, has also been a general partner of Berry
Cash Southwest Partnership, a venture capital firm. Mr. Cash is a director of
Cirrus Logic, Inc. ("CRUS" - NASD), a semiconductor company and ProNet, Inc.,
("PNET" - NASD), a distributor of medical pagers and electronic tracking
systems. He served as a director of Cyrix Corporation ("CYRX" - NASD), a
manufacturer and distributor of math co-processors until it was acquired by
National Semiconductor in 1997. Mr. Cash has served as a director of the Company
since September 1993. Mr. Cash and Mr. Cowart are first cousins.

DAVID A. LAHAR, since February 1992 has served as President of EOS Capital,
Inc., a private capital firm which has been, from time to time, retained by the
Company. From December 31, 1992 until July 1996, Mr. Lahar also served as the
President of the Company and formerly served as the Chief Financial Officer of
the Company. Mr. Lahar has been a director of the Company since October 1992.


                                       32

<PAGE>   33

THOMAS E. McINERNEY, since 1987, has been a general partner of Welsh, Carson,
Anderson & Stowe and has been a general partner of the respective sole general
partners of its associated limited partnerships. Mr. McInerney, since 1988, has
served as a Director of DecisionOne Holdings Corp. ("DOCI" - NASD), and from
1994 to 1995, served as its Chairman. Mr. McInerney is also a director of Bisys
Group, Inc. ("BSYS" - NASD). Mr. McInerney has been a director of the Company
since March 1996.

RICHARD H. STOWE, since 1979, has been a general partner of Welsh, Carson,
Anderson & Stowe and has been a general partner of the respective sole general
partners of its associated limited partnerships. Mr. Stowe is a director of
EmCare Holdings Inc. ("EMCR" - NASD), a provider of physician services
management in hospital emergency departments; Medaphis Corporation ("MEDA" -
NASD), a provider of accounts receivable management services to
hospital-affiliated physicians and hospitals; Health Management Systems,
Inc.("HMSY" - NASD), a provider of revenue enhancement services for health care
providers and payors, and several private companies.
Mr. Stowe has been a director of the Company since March 1996.

JOHN F. THOMPSON joined the Company in July 1997 as President and Chief
Operating Officer and was appointed Chief Executive Officer in October 1997.
Prior to joining the Company, he was employed for thirteen years at Merisel,
Inc., or its predecessors, an international distributor of computer accessories,
software and peripherals last holding the position of Senior Vice President,
Worldwide Operations. His prior experience includes senior management positions
with Vidal Sassoon, Inc, Max Factor, Cutter Labs and Mattel Toys.

JAMES N. CONTARDI joined the Company in May 1997. Prior to joining the Company,
he was Vice President - Sales and marketing for PC Services Source of Dallas,
Texas where he was employed for three years. His earlier experience included
nine years in various positions at IBM.

GEORGE M. KORCHINSKY joined Aurora in November 1996. From May 1991 to October
1996, Mr. Korchinsky served as Vice President & Managing Director - Europe,
Middle East, Africa for Symantec. From January 1989 to May 1991, Mr. Korchinsky
served as General Manager Northern & Central Europe from Cognos Ltd. From
January 1987 to January 1989, Mr. Korchinsky served as Managing Director Data
Communications Equipment for Paradyne Ltd. and from 1984 to 1987 held various
sales, marketing and technical management positions with Paradyne Ltd.

THOMAS M. PECK joined the Company with the acquisition of MicroLine, Inc. in
April 1997. Mr. Peck was a founder of and President of MicroLine since 1992.
Prior to founding MicroLine, he was an Account Manager with Computer Systems
Repair of Secaucas, New Jersey.

JAMES STAMENSON joined the Company in October 1997 after six years with
Aeroquip/Vickers Corporation of Los Angeles, California, lastly as Director of
Operations of the Vickers Fluid Control and Actuation Division. His prior
experience was with Parker Hannifin Corporation and Bertea Industries.

F. WAYNE WITHERS joined the Company in July 1997 following five years as Chief
Financial Officer of PrimeSource, Inc. a Dallas, Texas based privately-owned
wholesale distributor of building products and construction fasteners. His
earlier experience includes Chief Financial Officer positions at public
companies Naugles, Inc., Sav-On Drugs, Inc. and Denny's, Inc.

AMIR ASADI joined Aurora in April 1996 as Vice President - Information Systems.
From June 1990 to April 1996, Mr. Asadi served as Vice President, Information
Systems for Home Fashions Inc. From October 1987 to June 1990, Mr. Asadi served
as Director, Systems Development of Beech Street of California. From May 1986 to
October 1987, Mr. Asadi served as Information Systems Consultant, Project
Manager for Fremont Indemnity.

ERIC AUGUSTA joined the Company with the acquisition of Century in 1994 and has
served in various financial positions since then. Prior to Century, he was a
Senior Financial Analysts with Xerox Corporation.



                                       33
<PAGE>   34
ITEM 11.  EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

The following table sets forth information with respect to the compensation paid
by the Company to the Named Executive Officers during fiscal 1997, 1996 and
1995:



<TABLE>
<CAPTION>
                                                                         Long Term
                                                                        Compensation
                                                                           Awards
                                                                         Securities
                                  Fiscal      Annual   Compensation      Underlying        All Other
                                   Year       Salary       Bonus         Options (#)    Compensation(1)
                                  ------    --------   ------------     ------------    ---------------
<S>                                <C>       <C>           <C>          <C>                 <C>  
Jim C. Cowart(2)                   1997      208,449
  Chairman of the Board &          1996      190,631       10,534       1,334,954(4)        1,968
  former Chief Executive Officer   1995      168,080      112,742(3)       66,000(5)        4,126

John P. Grazer(6)                  1997      157,257      150,000                           4,303
  Former President and             1996      170,936       10,514         899,668(7)        3,963
  Chief Financial Officer          1995      143,322      106,425(3)       66,000(5)        4,893

Richard A. Kain                    1997      178,001                                        2,772
  Senior Vice President,           1996      144,616       36,000         100,000(8)        4,726
  North American Operations        1995       45,000        3,125          20,000(5)             

Amir Asadi                         1997      127,891
  Vice President -                 1996       55,289
  Information Systems

Stephan F. Weber                   1997      122,791
 Vice President -                  1996       39,570
 Marketing
</TABLE>


(1)    The amounts in this column consist only of Company contributions under
       the Company's 401(k) plan.

(2)    Mr. Cowart resigned as Chief Executive Officer of the Company on October
       22, 1997. See - EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT
       ARRANGEMENTS

(3)    In connection with the Recapitalization, Messrs. Cowart and Grazer
       received bonuses in the amounts of $112,000 and $105,000, respectively,
       in respect of 1995 performance that became payable in the event that a
       satisfactory recapitalization of the Company was obtained.

(4)    During May 1996, Mr. Cowart surrendered for cancellation all of his
       outstanding options to purchase shares of Common Stock, and he was issued
       replacement options under the Company's 1996 Stock Option Plan (the "1996
       Plan") to purchase an aggregate of 1,334,954 shares of Common Stock.




                                       34
<PAGE>   35
(5)    During May 1995, the Compensation and Stock Option Committee of the Board
       of Directors offered each optionee the opportunity to surrender for
       cancellation his or her outstanding options and replace such outstanding
       options with non-qualified stock options to acquire eighty percent (80%)
       of the number of shares of the options as canceled, at a price per share
       equal to twenty-five cents ($0.25) over the closing price of the Common
       Stock on May 15, 1995.

(6)    On October 22, 1996, the Company and Mr. Grazer entered into an
       employment agreement concurrent with Mr. Grazer becoming President as
       well as Chief Financial Officer that provided for a one-time bonus for
       accepting the position of $150,000, annual base salary of $175,000 and
       other provisions relating to stock options and severance benefits. Mr.
       Grazer resigned from the Company effective in May of 1997 and the
       agreement terminated. See - EMPLOYMENT AGREEMENTS AND TERMINATION OF
       EMPLOYMENT ARRANGEMENTS

(7)    During May 1996, Mr. Grazer surrendered for cancellation all of his
       outstanding options to purchase shares of Common Stock, and he was issued
       replacement options under the 1996 Plan to purchase an aggregate of
       899,668 shares of Common Stock.

(8)    During May 1996, Mr. Kain surrendered for cancellation all of his
       outstanding options to purchase shares of Common Stock, and he was issued
       replacement options under the 1996 Plan to purchase an aggregate of
       100,000 shares of Common Stock.

COMPENSATION OF DIRECTORS

Each non-employee director receives $2,500 for each quarter that such person
serves as a director of the Company. Officers of the Company do not receive any
fees for serving on the Board of Directors. Non-employee directors are
automatically granted nonqualified stock options to purchase 25,000 shares of
Common Stock upon election to the Board of Directors and options to purchase
5,000 shares of Common Stock on the date of each annual meeting of the Company's
stockholders when such non-employee director has served on the Board of
Directors for the immediately preceding 181 consecutive days, has agreed to
serve as a director upon such re-election and is re-elected to the Board of
Directors. All directors are entitled to reimbursement for expenses incurred for
attendance at each meeting.

EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS

Jim C. Cowart. Mr. Cowart and the Company entered into an employment letter
effective as of May 18, 1995, pursuant to which he served as Chairman of the
Board and Chief Executive Officer of the Company. Under the employment letter,
Mr. Cowart receives an annual base salary and an incentive bonus based upon
certain financial performance targets of the Company. If the Company terminates
Mr. Cowart's employment without cause (as defined in the letter), Mr. Cowart's
compensation and option vesting will continue for twelve (12) months. In the
event of a change of control of the Company, Mr. Cowart's stock options vest
immediately, and his compensation will continue for a period of two years. On
October 22, 1997 Mr. Cowart resigned as Chief Executive Officer and agreed to
continue as Chairman of the Board pursuant to the terms of the employment letter
until October 21, 1998.

John P. Grazer. Mr. Grazer and the Company entered into an employment letter
effective as of October 22, 1996, pursuant to which he served as President and
Chief Financial Officer of the Company. Under the employment letter, Mr. Grazer
received an annual base salary and an incentive bonus based upon certain
financial performance targets of the Company. If the Company terminates Mr.
Grazer's employment without cause (as defined in the letter), Mr. Grazer's
compensation will continue for fifteen (15) months. In the event of a change of
control of the Company that leads to Mr. Grazer's termination, Mr. Grazer's
compensation will continue for a period of fifteen (15) months, and his stock
options will vest immediately (unless otherwise determined by the Compensation
Committee). Mr. Grazer resigned from the Company effective in May of 1997 and
the agreement terminated.


                                       35
<PAGE>   36
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS

Harvey B. Cash, Thomas E. McInerney (Chairman) and Richard H. Stowe served on
the Compensation and Stock Option Committee of the Board of Directors during the
last fiscal year. Neither Mr. Cash, Mr. McInerney nor Mr. Stowe are current or
former officers or employees of the Company.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table and notes thereto set forth certain information with respect
to the beneficial ownership of the Company's Common Stock as of December 31,
1997 by (i) each of the "Named Executive Officers" (as defined in Regulation S-K
to the 1933 Securities Act, as amended), (ii) each director of the Company,
(iii) each beneficial owner of more than 5% of the Company's Common Stock and
(iv) all executive officers and directors of the Company as a group.

Except as otherwise indicated, each of the stockholders named below has sole
voting and investment power with respect to the shares of Common Stock
beneficially owned:


<TABLE>
<CAPTION>
                                                                 AMOUNT AND
                                                                  NATURE OF             PERCENT
          NAMES AND ADDRESSES                       CLASS OF      BENEFICIAL         OF OUTSTANDING
          OF BENEFICIAL OWNERS                       STOCK      OWNERSHIP (1)            SHARES
          --------------------                      --------    -------------        --------------
<S>                                                 <C>        <C>                   <C>  
Harvey B. Cash (*)                                  Common          164,712 (3)            0.46%
Jim C. Cowart (*)/(**)                              Common          688,834 (4)            1.91%
David A. Lahar (**)                                 Common          671,546 (5)            1.86%
Thomas E. McInerney (*)                             Common       26,044,306 (6)(7)        72.10%
Richard H. Stowe (*)                                Common       26,027,330 (6)(8)        72.05%
John P. Grazer                                      Common          158,418 (9)             ***
Richard A. Kain                                     Common           77,550 (10)            ***
Amir Asadi                                          Common           28,125 (11)            ***
Stephan F. Weber                                    Common            9,375 (12)            ***
WCAS Capital Partners II, L.P. (2)                  Common          682,960 (13)           1.89%
Welsh, Carson, Anderson & Stowe VII, L.P. (2)       Common       27,100,151 (14)          75.02%
WCAS Information Partners, L.P. (2)                 Common          340,096 (15)           0.94%

Directors and Executive Officers
     as a group (5 persons)                                      27,569,398 (16)          76.32%
</TABLE>

*   Director
**  Named Executive Officer
*** Less than one percent (1)

(1)      Sole voting and investment power unless otherwise indicated, subject to
         community property laws where applicable. Shares of Common Stock that
         can be acquired through the conversion of Convertible Preferred Stock
         are deemed outstanding for the purpose of computing the percentage of
         beneficial ownership. Shares of Common Stock that were not outstanding
         but that could be acquired through the exercise of stock options,
         warrants or the conversion of convertible debentures within 60 days of
         January 31, 1997 are deemed outstanding for the purpose of computing
         the percentage of outstanding shares beneficially owned by a particular
         person. However, such shares are not deemed outstanding for the purpose
         of computing the percentage of outstanding shares beneficially owned by
         any other person.


                                       36

<PAGE>   37

(2)      Address at:
         320 Park Avenue, Suite 2500
         New York, NY 10022-6815

(3)      Includes (i) currently exercisable stock options to purchase 40,000
         shares of the Company's Common Stock, (ii) 2,000 shares of the
         Company's Convertible Preferred Stock directly owned by Mr. Cash, which
         if converted, represents 104,712 shares of Common Stock and (iii)
         20,000 shares of Common Stock owned by Mr. Cash.

(4)      Includes (i) currently exercisable stock options to purchase 688,834
         shares of the Company's Common Stock, (ii) 2,000 shares of the
         Company's Convertible Preferred Stock directly owned by Mr. Cowart,
         which if converted, represents 104,714 shares of Common Stock and (iii)
         47,729 shares of Common Stock owned by Mr. Cowart.

(5)      Includes (i) currently exercisable stock options to purchase 676,546
         shares of the Company's Common Stock and (ii) 21,287 shares of Common
         Stock owned by Mr. Lahar.

(6)      Messrs. McInerney and Stowe are general partners of the respective sole
         general partners of WCAS Capital Partners II, L.P., Welsh, Carson,
         Anderson & Stowe VII, L.P. and WCAS Information Partners, L.P., and may
         be deemed to beneficially own the shares of Common Stock and
         Convertible Preferred stock owned by such partnerships

(7)      Includes (i) currently exercisable stock options to purchase 30,000
         shares of the Company's Common Stock, (ii) 2,067 shares of the
         Company's Convertible Preferred Stock owned directly by Mr. McInerney,
         which if converted, represents 119,001 shares of Common Stock, (iii)
         607,211 shares of the Company's Common Stock beneficially owned by WCAS
         Capital Partners, II L.P., (iv) 433,319 shares of the Company's
         Convertible Preferred Stock, which if converted, represents 24,947,998
         shares of Common Stock beneficially owned by Welsh, Carson, Anderson &
         Stowe VII, L.P. and (v) 5,907 shares of the Company's Convertible
         Preferred Stock, which if converted, represents 340,096 shares of
         Common Stock beneficially owned by WCAS Information Partners, L.P.

(8)      Includes (i) currently exercisable stock options to purchase 30,000
         shares of the Company's Common Stock, (ii) 1,772 shares of the
         Company's Convertible Preferred Stock owned directly by Mr. Stowe,
         which if converted, represents 102,024 shares of Common Stock, (iii)
         607,211 shares of the Company's Common Stock beneficially owned by WCAS
         Capital Partners, II L.P., (iv) 433,319 shares of the Company's
         Convertible Preferred Stock, which if converted, represents 24,947,998
         shares of Common Stock beneficially owned by Welsh, Carson, Anderson &
         Stowe VII, L.P. and (v) 5,907 shares of the Company's Convertible
         Preferred Stock, which if converted, represents 340,096 shares of
         Common Stock beneficially owned by WCAS Information Partners, L.P. .


                                       37
<PAGE>   38

(9)     Includes (i) currently exercisable stock options to purchase 154,987
        shares of the Company's Common Stock, and (ii) 3,431 shares of Common
        Stock.

(10)    Includes (i) currently exercisable stock options to purchase 154,987
        shares of the Company's Common Stock.

(11)    Includes (i) currently exercisable stock options to purchase 154,987
        shares of the Company's Common Stock.

(12)    Includes (i) currently exercisable stock options to purchase 154,987
        shares of the Company's Common Stock.

(13)    Reflects ownership of 607,211 shares of Common Stock beneficially owned
        and warrants to purchase 75,749 shares of common stock.

(14)    Reflects ownership of 433,319 shares of Convertible Preferred Stock,
        which if converted, represents 24,947,998 shares of Common Stock and
        warrants to purchase 2,152,153 shares of common stock.

(15)    Reflects ownership of 5,907 shares of Convertible Preferred Stock, which
        if converted, represents 340,096 shares of Common Stock.

(16)    Includes (i) 92,447 shares of Common Stock, (ii) 1,755,367 shares of
        Common Stock issuable upon exercise of stock options and (iii) 379,050
        shares of Convertible Preferred Stock, which if converted, represents
        17,837,647 shares of Common Stock.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         None

                                       38

<PAGE>   39
                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated: January 12, 1998

                            AURORA ELECTRONICS, INC.


By: /s/ F. Wayne Withers
   ------------------------
F. Wayne Withers, Senior Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on January 12, 1998 by the following persons on behalf of the
registrant and in the capacities indicated.

SIGNATURE                                            TITLE
---------                                            -----
/s/ John F. Thompson                  President and Chief Executive Officer
---------------------------           (Principal Executive Officer)
John F. Thompson

/s/ Jim C. Cowart                     Chairman
---------------------------
Jim C. Cowart

/s/ Harvey B. Cash                    Director
---------------------------
Harvey B. Cash

/s/ David A. Lahar                    Director
---------------------------
David A. Lahar

/s/ Thomas E. McInerney               Director
---------------------------
Thomas E. McInerney

/s/ Richard H. Stowe                  Director
---------------------------
Richard H. Stowe



                                       39

<PAGE>   40
                               INDEX TO EXHIBITS

Exhibit
Number                                  Description of Exhibits
------                                  -----------------------
3.1              The Restated Certificate of Incorporation of the Company, as
                 amended (incorporated by reference from Exhibit 3.1 to the
                 Company's Transition Report on Form 10-K for the transition
                 period from December 31, 1991 to September 30, 1992).

3.2              Bylaws of the Company, as amended (incorporated by reference
                 from Exhibit 4.2 to the Company's Registration Statement on
                 Form S-8 (Registration No. 33-79426)).

4.1              Indenture between the Company and MBank Dallas, National
                 Association relating to the Company's 7-3/4% Convertible
                 Subordinated Debentures due 2001, including form of
                 Debenture (incorporated by reference from Exhibit 4.1 to
                 the Company's Registration Statement on Form S-2
                 (Registration No. 33-4276)).

4.2              First Supplemental Indenture relating to the Company's 7-3/4%
                 Convertible Subordinated Debentures, dated December 1, 1987,
                 between the Company and MTrust Corp., National Association,
                 appointing MTrust Corp. as successor trustee to MBank Dallas
                 (incorporated by reference from Exhibit 4.2 to the Company's
                 Annual Report on Form 10-K for the fiscal year ended September
                 30, 1993).

4.3              Tripartite Agreement relating to the Company's 7-3/4%
                 Convertible Subordinated Debentures, dated as of January 7,
                 1990, by and among MTrust Corp., National Association,
                 Ameritrust Texas N.A., and the Company (incorporated by
                 reference from Exhibit 4.3 to the Company's Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1989).

4.4              Second Supplemental Indenture relating to the Company's 7-3/4%
                 Convertible Subordinated Debentures, dated to be effective as
                 of November 30, 1992, between the Company and Society National
                 Bank (incorporated by reference from Exhibit 4.4 to the
                 Company's Post-Effective Amendment No. 1 to Registration
                 Statement on Form S-3 (No. 33-32377)).

4.5              Certificate of Designations, Preferences and Rights of
                 Convertible [__] Preferred Stock dated March 1996 relating to
                 400,000 shares of Preferred Stock.

4.6              Common Stock Purchase Warrant (Paribas), Form of Warrant to
                 Purchase 94,903 Shares of Common Stock of Aurora Electronics,
                 Inc., dated May 12, 1994, issued to each of Banque Paribas and
                 Banque Indosuez (incorporated by reference from Exhibit 4.2 to
                 the Company's Report on Form 8-K dated May 26, 1994).

4.7              Common Stock Warrant (Lender) Banque Indosuez, Form of
                 Warrant to Purchase Shares of Common Stock of Aurora


                                       40
<PAGE>   41
                 Electronics, Inc., dated May 12, 1994, issued to each of Banque
                 Paribas, Banque Indosuez and Union Bank (incorporated by
                 reference from Exhibit 4.3 to the Company's Report on Form 8-K
                 dated May 26, 1994).

4.8              Aurora Electronics, Inc. Common Stock Purchase Warrant, dated
                 September 30, 1996, issued to Welsh, Carson, Anderson & Stowe
                 VII, L.P.

4.9              Aurora Electronics, Inc. Common Stock Purchase Warrant, dated
                 September 30, 1996, issued to WCAS Capital Partners II, L.P.

4.10             Form of Aurora Electronics, Inc. Common Stock Purchase Warrant,
                 issued to Welsh, Carson, Anderson & Stowe VII, L.P.

4.11             Form of Aurora Electronics, Inc. Common Stock Purchase Warrant,
                 issued to WCAS Capital Partners II, L.P.

*4.12            Welsh, Carson, Anderson & Stowe January 6, 1998 Waiver of Right
                 to Receive Warrants under Financial Support Agreement, dated as
                 of September 30, 1996, as amended.

*4.13            Certificate of Designations, Preferences and Relative Rights of
                 Series B Preferred Stock dated August 14, 1997 relating to
                 25,000 shares of Series B Preferred Stock.

*4.14            Certificate of Designations, Preferences and Relative Rights of
                 Series C Preferred Stock dated October 2, 1997 relating to
                 25,000 shares of Series C Preferred Stock.

*4.15            Certificate of Designations, Preferences and Relative Rights
                 Regarding Series D Preferred Stock dated October 2, 1997
                 relating to 20,000 shares of Series D Preferred Stock.

10.1             Aurora Electronics, Inc. 1993 Stock Option Plan, as amended by
                 Amendment No. 1 dated to be effective as of March 1, 1994 and
                 by Amendment No. 2 dated to be effective as of March 1, 1994
                 (incorporated by reference from Exhibit 4.3 to the Company's
                 Registration Statement on Form S-8 (Registration No.
                 33-79426)).

10.2             Aurora Electronics, Inc. 1996 Stock Option Plan (incorporated
                 by reference from Exhibit 10.19 to the Company's Form 10-Q for
                 the quarter ended June 30, 1996).

10.3             Form of Indemnification Agreement entered into between the
                 Company and each of the directors of the Company (incorporated
                 by reference from Exhibit 10.3 to the Company's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 1991).

10.4             Letter Agreement, dated October 22, 1996, between the Company
                 and John P. Grazer relating to employment.

10.5             Letter Agreement, dated March 1, 1994, between the Company and
                 Jim C. Cowart relating to employment (incorporated by reference
                 from Exhibit 10.5 to the Company's Annual Report on Form 10-K
                 for the fiscal year ended September 30, 1994).

10.5.1           Letter Agreement, dated May 18, 1995, between the Company and
                 Jim C. Cowart relating to employment (incorporated by reference
                 from Exhibit 10.5.1 to the Company's Annual Report on Form 10-K
                 for the fiscal year ended September 30, 1995)

10.8             Standard Multi-Tenant Net Lease, dated November 3, 1992, by and
                 between Sorrento Mesa Properties, Inc. and Micro-C Corporation
                 (now Aurora Electronics Group, Inc.) (incorporated by reference
                 from Exhibit 10.7 to the Company's Annual Report on Form 10-K
                 for the fiscal year ended September 30, 1993).

10.9             Standard Industrial Lease - Net, dated March 27, 1984, by and
                 between Northgate Investment Company (now David Pick) and



                                       41
<PAGE>   42
                 Repair Services, Inc. (now Aurora Electronics Group, Inc.)
                 (incorporated by reference from Exhibit 10.8 to the Company's
                 Annual Report on Form 10-K for the fiscal year ended September
                 30, 1993).

10.10            Standard Industrial / Commercial Single Tenant Lease - Net
                 dated November 30, 1994, by and between The Equitable Life
                 Assurance Society of the United States and Aurora Electronics
                 Group, Inc. (incorporated by reference from Exhibit 10.9 to the
                 Company's Annual Report on Form 10-K for the fiscal year ended
                 September 30, 1994).

10.11            Standard Lease Agreement dated October 27, 1992, by and between
                 Crow-Brindell-Mitchell and Aurora Electronics Group, Inc. as
                 Assignee of CCB Computer Brokers, Inc. d/b/a Century Computer
                 Services, Inc. (incorporated by reference from Exhibit 10.10 to
                 the Company's Annual Report on Form 10-K for the fiscal year
                 ended September 30, 1994).

10.12            Lease Agreement Shelby Distribution Center dated November 11,
                 1994 by and between J. Shea Leatherman, William A. Leatherman,
                 Jr., Irwin L. Zanone and Aurora Electronics Group, Inc.
                 (incorporated by reference from Exhibit 10.11 to the Company's
                 Annual Report on Form 10-K for the fiscal year ended September
                 30, 1994).

10.13            Lease dated July 14, 1988, by and between American National
                 Bank and Trust Company of Chicago and BSN Corp. (now Aurora
                 Electronics, Inc.) (incorporated by reference from Exhibit
                 10.12 to the Company's Annual Report on Form 10-K for the
                 fiscal year ended September 30, 1994).

10.14            Form of Tax Indemnity Agreement by and between the Company
                 and SSG (incorporated by reference from Exhibit 10.9 to the
                 Company's Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1991).

10.15            Stock Purchase Agreement, dated as of September 30, 1992, by
                 and among the Company, Robert E. Morris and Norma J. Morris,
                 Trustees of the Robert and Norma Morris Family Trust and The
                 Robert and Norma Morris Charitable Remainder Unitrust
                 (incorporated by reference from Exhibit 2.1 to Form 8-K filed
                 on October 19, 1992).

10.16            Merger Agreement and Plan of Reorganization, dated September
                 12, 1993, by and between the Company and FRS, Inc.
                 (incorporated by reference from Exhibit 2.1 to the Company's
                 Current Report on Form 8-K, dated October 15, 1993).

10.17            Asset Purchase Agreement, dated March 15, 1994 to be effective
                 as of March 1, 1994, as amended, by and among the Company,
                 Aurora Electronics Group, Inc. and CCB Computer Brokers, Inc.
                 and CCM Computers International, Ltd. (incorporated by
                 reference from Exhibit (b)(1) to the Company's Quarterly Report
                 on Form 10-Q for


                                       42
<PAGE>   43
                 the quarter ended March 31, 1994).

10.18            Aurora Electronics, Inc. 401-K Plan (incorporated by reference
                 from Exhibit 10.13 to the Company's Annual Report on Form 10-K
                 for the fiscal year ended September 30, 1993).

10.19            Securities Purchase Agreement among Aurora Electronics, Inc.,
                 Welsh, Carson, Anderson & Stowe VII, L.P., WCAS Capital
                 Partners II, L.P. and the Several Purchasers Named Therein,
                 dated February 21, 1996, incorporated by reference from Exhibit
                 (b)(2) of the Company's Issuer Tender Offer Statement on
                 Schedule 13E-4, which was filed with the Securities and
                 Exchange Commission on February 23, 1996.

10.20            Aurora Electronics Inc. Offer to Purchase for Cash up to
                 6,500,000 Shares of Its Common Stock at $2.875 Per Share, dated
                 February 23, 1996, incorporated by reference from Exhibit
                 (a)(1) of the Company's Issuer Tender Offer Statement on
                 Schedule 13E-4, which was filed with the Securities and
                 Exchange Commission on February 23, 1996.

10.21            Credit Agreement among Aurora Electronics Group, Inc., as
                 Borrower, the Guarantors Named Therein, the Lenders Named
                 therein and Chemical Bank, N.A., as Agent, dated March 29, 1996
                 (incorporated by reference from Exhibit 10.21 to the Company's
                 Report on Form 8-K dated March 29, 1996).

10.22            $15,000,000 Tranche A Note between Aurora Electronics Group,
                 Inc., as Maker, and Chemical Bank, N.A., as Lender, dated March
                 29, 1996 (incorporated by reference from Exhibit 10.22 to the
                 Company's Report on Form 8-K dated March 29, 1996).

10.23            $20,000,000 Tranche B Note between Aurora Electronics Group,
                 Inc., as Maker, and Chemical Bank, N.A., as Lender, dated March
                 29, 1996 (incorporated by reference from Exhibit 10.23 to the
                 Company's Report on Form 8-K dated March 29, 1996).

10.24            Pledge Agreement among Aurora Electronics Group, Inc.,
                 Aurora Electronics, Inc. and Chemical Bank, N.A., dated March
                 29, 1996 (incorporated by reference from Exhibit 10.24
                 to the Company's Report on Form 8-K dated March 29, 1996).

10.25            Security Agreement among Aurora Electronics Group, Inc.,
                 Aurora Electronics, Inc. and Chemical Bank, N.A., dated March
                 29, 1996 (incorporated by reference from Exhibit 10.25
                 to the Company's Report on Form 8-K dated March 29, 1996).

10.26            Security Agreement and Mortgage -- Patents and Trademarks
                 among Aurora Electronics Group, Inc., Aurora Electronics, Inc.
                 and Chemical Bank, N.A., dated March 29, 1996
                 (incorporated by reference from Exhibit 10.26 to the
                 Company's Report on Form 8-K dated March 29, 1996).




                                       43
<PAGE>   44
10.27            Assignment for Security (Patents) among Aurora Electronics
                 Group, Inc., as Assignor, and Chemical Bank, as Assignee,
                 dated March 29, 1996 (incorporated by reference from
                 Exhibit 10.27 to the Company's Report on Form 8-K dated
                 March 29, 1996).

10.28            Assignment for Security (Patents) among Aurora Electronics,
                 Inc., as Assignor, and Chemical Bank, as Assignee, dated March
                 29, 1996 (incorporated by reference from Exhibit 10.28
                 to the Company's Report on Form 8-K dated March 29, 1996).

10.29            Assignment for Security (Trademarks) among Aurora
                 Electronics Group, Inc., as Assignor, and Chemical Bank, as
                 Assignee, dated March 29, 1996 (incorporated by reference from
                 Exhibit 10.29 to the Company's Report on Form 8-K dated
                 March 29, 1996).

10.30            Assignment for Security (Trademarks) among Aurora Electronics,
                 Inc., as Assignor, and Chemical Bank, as Assignee, dated March
                 29, 1996 (incorporated by reference from Exhibit 10.30 to the
                 Company's Report on Form 8-K dated March 29, 1996).

10.31            Registration Rights Agreement, among Aurora Electronics, Inc.,
                 Welsh, Carson, Anderson & Stowe VII, L.P., and WCAS Capital
                 Partners II, L.P., dated March 29, 1996.

10.32            Aurora Electronics, Inc. 10% Senior Subordinated Note due
                 September 30, 2001, by Aurora Electronics, Inc. as payor to
                 WCAS Capital Partners II, L.P., as payee, dated March 29, 1996.

10.33            Financial Support Agreement, among Aurora Electronics, Inc.,
                 Aurora Electronics Group, Inc., Welsh, Carson, Anderson & Stowe
                 VII, L.P., and WCAS Capital Partners II, L.P., dated as of
                 September 30, 1996.

10.34            Limited (Overadvance) Guarantee, made by Welsh, Carson,
                 Anderson & Stowe, VII, L.P. and WCAS Capital Partners II, L.P.,
                 each a Guarantor, and collectively, the Guarantors, in favor of
                 The Chase Manhattan Bank (formerly known as Chemical Bank), as
                 Agent for the Lenders, dated as of September 30, 1996.

10.35            Limited (Acquisition) Guarantee, made by Welsh, Carson,
                 Anderson & Stowe, VII, L.P. and WCAS Capital Partners II, L.P.,
                 each a Guarantor, and collectively, the Guarantors, in favor of
                 The Chase Manhattan Bank (formerly known as Chemical Bank), as
                 Agent for the Lenders, dated as of September 30, 1996.

10.36            Form of Note, Aurora Electronics Group, Inc. 10% Senior
                 Subordinated Note due September 30, 2001, by Aurora Electronics
                 Group, Inc. as payor.



                                       44

<PAGE>   45

10.37            Amendment No. 1 to Registration Rights Agreement, among Aurora
                 Electronics, Inc. and the parties listed on Schedule I thereto,
                 dated as of September 30, 1996.

*10.38           Letter Agreement, dated November 21, 1997, between the 
                 Company and John F. Thompson relating to employment.

*10.39           Amended and Restated Financial Support Agreement, among Aurora
                 Electronics, Inc., Aurora Electronics Group, Inc., Welsh,
                 Carson, Anderson & Stowe VII, L.P., and WCAS Capital Partners
                 II, L.P., dated as of            , 1997.

*10.40           Securities Purchase Agreement dated August 14, 1997 between
                 Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe
                 VII, L.P. for the purchase of Aurora Electronics, Inc. Series
                 B Preferred Stock.

*10.41           Securities Purchase Agreement dated October 2, 1997 between
                 Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe
                 VII, L.P. for the purchase of Aurora Electronics, Inc. Series C
                 Preferred Stock.

*10.42           Securities Purchase Agreement dated October 24, 1997 between
                 Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe
                 VII, L.P. for the purchase of Aurora Electronics, Inc. Series D
                 Preferred Stock.

*10.43           Senior Subordinated Note Purchase Agreement among Aurora
                 Electronics, Inc. and Welsh, Carson, Anderson & Stowe VII, L.P.

*10.44           Form of $2,800,000 10% Senior Subordinated Demand Note dated
                 December 5, 1997 between Aurora Electronics, Inc., as payor,
                 and Welsh, Carson, Anderson & Stowe VII, L.P., as payee.

*11              Computation of Earnings Per Share

21.1             Subsidiaries of the Company:

21.2             
<TABLE>
<CAPTION>
                                                                   JURISDICTION
                      NAME                                       OF INCORPORATION
<S>                                                              <C>
                 Aurora Electronics Group, Inc.                    California
                 Aurora Electronics Limited                        United Kingdom
</TABLE>

*23.1            Consent of Arthur Andersen LLP

*27              Financial Data Schedule



*Filed herewith.

                                       45