<PAGE>
 
================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549


                                   FORM 10-Q
                                        
                                        
                 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                                        
For the Quarter Ended August 31, 1998             Commission File Number 0-17249



                              AURA SYSTEMS, INC.
            (Exact name of Registrant as specified in its charter)

            DELAWARE                                     95-4106894
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

                               2335 ALASKA AVE.
                         EL SEGUNDO, CALIFORNIA 90245
                   (Address of principal executive offices)

Registrant's telephone number, including area code:    (310) 643-5300

Former name, former address and former fiscal year, if changed since last
report: None


          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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE> 
<CAPTION> 
                   Class                    Outstanding at October 14, 1998
                   -----                    -------------------------------
<S>                                         <C> 
          Common Stock, par value                   85,921,996 Shares
              $.005 per share
</TABLE> 


================================================================================
<PAGE>
 
                      AURA SYSTEMS, INC. AND SUBSIDIARIES

                                     INDEX
<TABLE> 
<CAPTION>                                         
                                                                          Page No.
<S>                                                                       <C> 
PART I.   FINANCIAL INFORMATION
 
     ITEM 1.  Financial Statements

              Statement Regarding Financial Information                      2
 
              Condensed Consolidated Balance Sheets as of August 31, 1998     
              and February 28, 1998                                          3
 
              Condensed Consolidated Statement of Operations for the Three 
              Months and Six Months Ended August 31, 1998 and 1997           4
              
              Condensed Consolidated Statements of Cash Flows for the Six 
              Months Ended August 31, 1998 and 1997                          5
 
              Notes to Condensed Consolidated Financial Statements           6
 
     ITEM 2.  Management's Discussion and Analysis of Financial Condition 
              and Results of Operations                                      9
 
 
PART II.  OTHER INFORMATION
 
     ITEM 1.  Legal Proceedings                                              12
 
     ITEM 4.  Submission of Matters to Vote by Security Holders              12
 
     ITEM 6.  Exhibits and Reports on Form 8-K                               12
 
SIGNATURES                                                                   13
</TABLE>
<PAGE>
 
                      AURA SYSTEMS, INC. AND SUBSIDIARIES

                         QUARTER ENDED AUGUST 31, 1998

                         PART I. FINANCIAL INFORMATION


The financial statements included herein have been prepared by Aura Systems,
Inc. (the "Company"), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC").  As contemplated by the SEC
under Rule 10-01 of Regulation S-X, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles.  However, the Company
believes that the disclosures are adequate to make the information presented not
misleading.  These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended February 28, 1998 as filed with the SEC (file number 0-17249).



                                       2
<PAGE>
 
                      AURA SYSTEMS, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                       AUGUST 31,    FEBRUARY 28,
ASSETS                                                    1998          1998
                                                      ------------   ------------
<S>                                                   <C>            <C> 
CURRENT ASSETS
  Cash and equivalents                                $  4,747,681   $  6,079,411
  Receivables-net                                       57,065,300     54,418,141
  Inventories and contract in process                   62,317,816     58,713,875
  Prepayments and deposits                               7,855,338     13,326,789
  Other current assets                                   4,734,163      5,925,642
  Prepaid and deferred income taxes                      1,426,220        838,000
                                                      ------------   ------------
 
     TOTAL CURRENT ASSETS                              138,146,518    139,301,858
 
  Property and equipment, at cost                       77,404,544     66,667,671
  Less accumulated depreciation
    and amortization                                   (15,291,949)   (11,888,586)
                                                      ------------   ------------
 
NET PROPERTY AND EQUIPMENT                              62,112,595     54,779,085
 
  Joint ventures                                         6,572,319      6,903,918
  Long-Term investments                                 12,306,662      7,476,299
  Long-Term receivables                                  3,663,094      3,627,098
  Patents and trademarks, net                            6,386,677      6,410,771
  Goodwill, net                                          6,061,267      6,146,642
  Other assets                                           2,335,325      2,656,958
                                                      ------------   ------------
     TOTAL                                            $237,584,457   $227,302,629
                                                      ============   ============
 
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
 
CURRENT LIABILITIES:
  Notes payable                                       $ 39,419,992   $ 31,147,572
  Accounts payable                                      38,564,639     43,995,364
  Accrued expenses                                       4,906,197      3,990,027
                                                      ------------   ------------
 
     TOTAL CURRENT LIABILITIES                          82,890,828     79,132,963

Notes payable and other liabilities                      8,475,078      3,282,003
                                                      ------------   ------------
Convertible notes secured                                  662,900      2,112,900
                                                      ------------   ------------
Convertible notes-unsecured                             23,500,000     15,500,000
                                                      ------------   ------------
Minority interests in subsidiaries                      11,138,755     10,372,895
                                                      ------------   ------------
 
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Common stock par value $.005 per share paid in       
    capital. Issued and outstanding 84,166,757
    and 80,001,244 shares respectively.                206,777,972    199,100,614
 
 
  Accumulated deficit                                  (95,861,076)   (82,198,746)
                                                      ------------   ------------
 
     Total stockholders' equity                        110,916,896    116,901,868
                                                      ------------   ------------
     TOTAL                                            $237,584,457   $227,302,629
                                                      ============   ============
</TABLE>

    See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>
 
                      AURA SYSTEMS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              THREE AND SIX MONTHS ENDED AUGUST 31, 1998 AND 1997
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                THREE MONTHS                      SIX MONTHS
                                                ------------                      ----------
                                             1998           1997             1998            1997
                                             ----           ----             ----            ----
<S>                                     <C>              <C>             <C>              <C>
NET REVENUES                            $ 39,103,054     $33,137,970     $ 71,555,592     $60,553,967
 
  Cost of goods and overhead              31,132,222      23,888,747       55,550,241      43,954,577
                                        ------------     -----------     ------------     ----------- 
 
GROSS PROFIT                               7,970,832       9,249,223       16,005,351      16,599,390
 
EXPENSES
 
  Selling, general and administrative      9,236,673       6,429,389       16,334,154      11,851,643
  Research and development                   525,387       1,230,480          821,733       2,109,394
                                        ------------     -----------     ------------     ----------- 
 
  Total costs and expenses                 9,762,060       7,659,869       17,155,887      13,961,037
                                        ------------     -----------     ------------     ----------- 
 
INCOME (LOSS) FROM OPERATIONS             (1,791,228)      1,589,354       (1,150,536)      2,638,353
 
OTHER (INCOME) AND EXPENSE
 
  Equity in losses of unconsolidated
    joint ventures                           175,000              --          500,000              --
  Other income                              (170,906)             --       (1,740,729)             --
  Legal settlements and legal costs        6,300,000              --        6,300,000              --
  Interest expense-net                     3,005,190       1,102,969        5,744,663       1,969,018
                                        ------------     -----------     ------------     ----------- 
 
INCOME (LOSS) BEFORE INCOME TAXES 
AND MINORITY INTERESTS                   (11,100,512)        486,385      (11,954,470)        669,335
 
  Provision for taxes                        314,000              --          942,000              --
  Minority interests in income of
    consolidated subsidiaries                264,863              --          765,860              --
                                        ------------     -----------     ------------     ----------- 
 
NET INCOME (LOSS)                       $(11,679,375)    $   486,385     $(13,662,330)    $   669,335
                                        ============     ===========     ============     =========== 
 
NET INCOME (LOSS) PER COMMON
SHARE-BASIC                             $       (.14)    $       .01     $       (.17)    $       .01
                                        ============     ===========     ============     =========== 
 
WEIGHTED AVERAGE SHARES USED
TO COMPUTE NET INCOME PER SHARE           82,630,599      79,356,084       81,328,557      78,222,689
                                        ============     ===========     ============     =========== 
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       4
<PAGE>
 
                      AURA SYSTEMS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE SIX MONTHS ENDED AUGUST 31, 1998 AND 1997
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                          1998             1997
                                                          ----             ----
<S>                                                   <C>              <C>
NET CASH (USED) IN OPERATIONS                         $ (8,196,839)    $(10,353,697)
                                                      ------------     ------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
  Investment in stock                                   (5,000,000)              --
  Additions to property and equipment                  (10,736,873)      (9,145,244)
  Disposition of property and equipment                         --          200,000
                                                      ------------     ------------
 
  NET CASH PROVIDED BY (USED) IN INVESTING
     ACTIVITIES                                        (15,736,873)      (8,945,244)
                                                      ------------     ------------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
  Net proceeds (repayment) from short-term
    borrowing                                            5,419,324         (288,607)
  Proceeds from issuance of convertible debt             8,000,000       19,000,000
  Net proceeds (repayment) of debt                       1,505,300       (3,130,003)
  Proceeds from exercise of stock options                  103,000               --
  Proceeds from exercise of warrants                     7,574,358               --
                                                      ------------     ------------
 
  NET CASH PROVIDED BY FINANCING ACTIVITIES:            22,601,982       15,581,390
                                                      ------------     ------------
 
NET INCREASE (DECREASE) IN CASH                         (1,331,730)      (3,717,551)
 
Cash and cash equivalents at beginning of year           6,079,411        7,112,354
                                                      ------------     ------------
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD            $  4,747,681     $  3,394,803
                                                      ============     ============
 
Supplemental disclosures of cash flow information
  Cash paid during the period for:
       Interest                                       $  2,975,814     $  1,454,537
       Income Tax                                          949,200            9,200
                                                      ============     ============
</TABLE>


Supplemental disclosure of noncash investing and financing activities:

In the six months ended August 31, 1997, $5,086,600 of convertible notes payable
were converted into common stock.

In the six months ended August 31, 1997, the Company disposed of assets in
exchange for a note receivable of $503,385 and cash of $200,000, which is
included above.


     See accompanying notes to condensed consolidated financial statements.


                                       5
<PAGE>
 
                              AURA SYSTEMS, INC.
                        NOTES TO CONDENSED CONSOLIDATED
                             FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                        

1)   MANAGEMENT OPINION

     The condensed consolidated financial statements include the accounts of
Aura Systems, Inc. ("the Company") and subsidiaries from the effective dates of
acquisition.  All material inter-company balances and inter-company transactions
have been eliminated.

     In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) and reclassifications for comparability necessary to
present fairly the financial position and results of operations as of and for
the three and six months ended August 31, 1998.

2)   CAPITAL

     In the six months ended August 31, 1997, $5,086,600 of convertible notes
were converted into common stock of the Company.  In the six months ended August
31, 1998, the Company received proceeds of $7,677,358 from the exercise of
warrants and options to purchase the Company's common stock.

3)   SIGNIFICANT CUSTOMERS

     The Company sold computer related products to three significant customers
during the six months ended August 31, 1997.  Sales of communication and
multimedia products to these three major mass merchandisers accounted for
approximately $34.5 million in the six months ended August 31, 1998 as compared
to $19.1 million in the six months ended August 31, 1997.

     None of the above customers are related or affiliated with the Company or
any customers of the Company.  The Company has no reason to believe that sales
to any of the current years customers will not continue.

4)   CONTINGENCIES

     The Company is engaged in various legal actions listed below.  To the
extent that judgment has been rendered, appropriate provision has been made in
the financial statements.

Shareholder Litigation
----------------------

Barovich/Chiau v. Aura Systems, Inc.
------------------------------------

     In May, 1995 two lawsuits naming Aura, certain of its directors and
executive officers and a former officer as defendants, were filed in the United
States District Court for the Central District of California, Barovich v. Aura
                                                              ----------------
Systems, Inc. et. al. (Case No. CV 95-3295) and Chiau v. Aura Systems, Inc. et.
--------------------                            -------- ----------------------
al. (Case No. CV 95-3296), before the Honorable Manuel Real. The complaints
--                                                                         
purported to be securities class actions on behalf of all persons who purchased
common stock of Aura during the period from May 28, 1993 through January 17,
1995, inclusive. The Complaints alleged that as a result of false and misleading
information disseminated by the defendants, the market price of Aura's common
stock was artificially inflated during the class period. The complaints were
consolidated as Barovich v. Aura Systems, Inc., et. al.
                -------------------------------------- 


                                       6
<PAGE>
 
     A settlement agreement for this proceeding was submitted to the Court on
July 20, 1998, for preliminary approval, at which time the Court denied the
plaintiffs' motion for approval of the settlement. On September 22, 1998, the
Company and certain of its officers and directors renoticed their motion for
summary judgment, which is set to be heard by the Court on October 19, 1998. In
addition, the Company earlier reached an agreement-in-principle with the
insurance carrier to settle its dispute on terms which would not have a material
impact on the Company. The settlement agreement with the insurance carrier was
conditioned upon the settlement of the underlying Barovich litigation. In
September, 1998, the insurance company's declaratory relief action was
dismissed, without prejudice, pending further discussions and documentation of
any settlement in the underlying Barovich action.

Morganstein v. Aura Systems, Inc.
---------------------------------

     On April 28, 1997, a lawsuit naming Aura, certain of its directors and
officers, and the Company's independent accounting firm was filed in the United
States District Court for the Central District of California, Morganstein v.
                                                              --------------
Aura Systems, Inc., et. al. (Case No. CV 97-3103), before the Honorable Steven
--------------------------                                                    
Wilson. A follow-on complaint, Ratner v. Aura Systems, Inc., et. al. (Case No.
                               ------------------------------------           
CV 97-3944), was also filed and later consolidated with the Morganstein
complaint. The consolidated amended complaint purports to be a securities class
action on behalf of all persons who purchased common stock of Aura during the
period from January 18, 1995 to April 25, 1997, inclusive. The complaint alleges
that as a result of false and misleading information disseminated by the
defendants, the market price of Aura's common stock was artificially inflated
during the Class Period. The complaint contains allegations which assert that
the company violated federal securities laws by selling Aura Common stock at
discounts to the prevailing U.S. market price under Regulation S without
informing Aura's shareholders or the public at large.

     In June, 1998, the Court entered an order staying further discovery in
order to facilitate completion of settlement discussions between the parties. On
October 12, 1998, the parties entered into a stipulation for settlement of all
claims, and the settlement terms are now subject to approval by the Court at a
hearing scheduled for November 2, 1998. Under the proposed settlement Aura will
pay $4.5 million in cash or stock, at Aura's option, plus 3.5 million warrants
at an exercise price of $2.25. In addition, Aura's insurance carrier has agreed
to pay $10.5 million. Therefore, the Company recorded a charge for this
litigation of $4.5 million in the quarter ended August 31, 1998.

Securities and Exchange Commission Settlement.
----------------------------------------------

     In October, 1996, the Securities and Exchange Commission ("Commission")
issued an order (Securities Act Release No. 7352) instituting an administrative
proceeding against Aura Systems, Zvi Kurtzman, and an Aura former officer. The
proceeding was settled on consent of all the parties, without admitting or
denying any of the Commission's findings.  In its order, the Commission found
that Aura and the others violated the reporting, recordkeeping and anti-fraud
provisions of the securities laws in 1993 and 1994 in connection with its
reporting on two transactions in reports previously filed with the Commission.
The Commission's order directs that each party cease and desist from committing
or causing any future violation of these provisions.

     The Commission did not require Aura to restate any of the previously issued
financial statements or otherwise amend any of its prior reports filed with the
Commission.  Also, the Commission did not seek any monetary penalties from Aura,
Mr. Kurtzman or anyone else.  Neither Mr. Kurtzman nor anyone else personally
benefited in any way from these events.  For a more complete description of the
Commission's Order, see the Commission's release referred to above.


                                       7
<PAGE>
 
Other Litigation.
-----------------

     The Company is also engaged in other legal actions.  In the opinion of
management, based upon the advice of counsel, the ultimate resolution of these
matters will not have a material adverse effect.



                                       8
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                        
     This Report may contain forward-looking statements, which involve risks and
uncertainties.  The Company's actual results may differ materially from the
results discussed in such statements.  Certain factors could also cause actual
results to differ materially from those discussed in such forward-looking
statements, including factors discussed in the Company's Form 10-K for the
period ended February 28, 1998, and factors discussed in this Report.

     RESULTS OF OPERATIONS

     Revenue for the three and six month periods ended August 31, 1998 increased
by $5,965,084 and $11,001,625 to $39,103,054 and $71,555,592 from the
corresponding periods in the prior year. The increased revenues resulted
primarily from sales from the Company's NewCom subsidiary and sales of speaker
products.

     The Company's NewCom subsidiary sold computer related products to three
significant customers during the six months ended August 31, 1998.  Sales of
communication and multimedia products to these three major mass merchandisers
accounted for approximately $34.5 million in the six months ended August 31,
1998 as compared to approximately $19.1 million in the six months ended August
31, 1997.  None of the above customers are related or affiliated with the
Company or any customers of the Company.  The Company has no reason to believe
that sales to any of the current years customers will not continue.

     Cost of goods and overhead for the three and six months ended August 31,
1998 increased by $7,243,475 and $11,595,664 in comparison with the
corresponding periods in the prior year in correspondence with the increase in
sales discussed above.

     Gross margins decreased to 20.4% and 22.4% in the three and six months
ended August 31, 1998, from 27.9% and 27.4% in the corresponding prior year
periods. The decreases are a result of the reduction in margins for mature
products of the Company's NewCom subsidiary such as the 33.6K modems and lower
speed CD ROM drives that were sold as the 56K modems and higher speed CD ROM
drives became the primary products in the modem and multimedia area.
Additionally, outside of the NewCom business, the Company began a concerted
effort to sell off excess inventory, at reduced margins as it focused its
operation on its AuraGen and speaker products.

     General and administrative costs increased for the three and six month
periods by $2,807,284 and $4,482,511 respectively primarily due to the Company's
continued expansion of its facilities and staff and the higher level of
advertising support for the products of the Company's NewCom subsidiary.  The
increase in general and administrative expenses is also partially due to an
increase in depreciation and amortization of $.70 million to $1.65 million and
$1.4 million to $3.9 million for the three and six months ended August 31, 1998
over the comparable period ended August 31, 1997.  Of the total increase in
general and administrative expenses of $2.8 million and $4.5 million
respectively, for the three and six months ended August 31, 1998, $1.8 million
and $3.3 million respectively, is attributed to the Company's subsidiary NewCom.
The Company expects that with its continued expansion, general and
administrative expenses will continue to increase.

     Research and development costs for the three and six months ended August
31, 1998 decreased by $705,093 and $1,287,661 as the Company focused its
attention on marketing and manufacturing of its products such as the AuraGen(TM)
and sound products.

     The Company lost $1,791,228 and $1,150,536 from operations for the three
and six months ended August 31, 1998 compared with earnings of $1,589,354 and
$2,638,353 in the prior year periods. This loss includes increases in
depreciation and amortization expense of $.7 million and $1.4 million
respectively which is primarily due to the amortizing of product development
costs over a 24 month period.


                                       9
<PAGE>
 
     In the six months ended August 31, 1998, the Company recorded a gain on the
sale of stock in its majority owned subsidiary NewCom of approximately $1.4
million.  There were no such sales in the quarter ended August 31, 1998 or the
prior year six months ended August 31, 1997.

     Interest expense increased by $1,902,221 to $3,005,190 and $3,775,645 to
$5,744,663 in the three and six months ended August 31, 1998 due to higher
levels of borrowing and the quarterly fee being charged to interest expense on
the note that was renegotiated in September 1997 from a convertible note to
straight debt.

     The net loss for the three months ended August 31, 1998, including a charge
for legal settlement and costs relating to the class action lawsuit of $6.3
million, and interest expense of $3.0 million totalled $11,679,375 compared to
earnings of $486,385 for the comparable period of Fiscal 1998.  For the six
months ended August 31, 1998, including the above charges, the Company lost
$13,662,330 compared to earnings of $669,335 in the prior year six months.

     The Company has vigorously defended the lawsuit referred to above. The
Company believes, however, that it is in its best interest to enter into the
proposed settlement in view of factors which include the disruption to the
Company's business caused by the litigation process, and the substantial
expenses the Company would have to incur to continue the discovery and trial
process.

     LIQUIDITY AND CAPITAL RESOURCES

     In the six months ended August 31, 1998, cash decreased by $1,331,730 to
$4,747,681 from $6,079,411, at February 28, 1998.  Accounts payable and accrued
expenses decreased by $4,514,555 from February 28, 1998.  Inventories increased
by $3,603,941 as the Company began to build inventory of AuraGen(TM) components
for the ramp up in AuraGen sales and to prepare for increasing shipments of
speakers, multi-media kits, modems and soundcards for the fall selling season.

     The increase in receivables of $2,647,159 is due primarily to the increase
in sales volume in speaker products and to shipments of its AuraGen(TM) product.

     Cash flows used in operations decreased by $2,156,858 compared to the prior
year six months.  Working capital decreased to $55,255,690 from $60,168,895 over
the fiscal year end level, with the current ratio declining to 1.67:1 from
1.76:1.

     In the six months ended August 31, 1998, the Company received proceeds of
$7,677,358 from the exercise of warrants and options to purchase the Company's
stock.  In the six months ended August 31, 1997, the Company received proceeds
of $19,000,000 from the sale of convertible notes payable.  The Company also
redeemed $3,200,000 of previously issued convertible notes

     In March 1997 the Company issued $15 million of convertible Debentures to a
group of accredited investors in a private placement.  The Debentures were
convertible into Common Stock of the Company in accordance with a stated
formula.  In October 1997 the Company and the investors entered into an
agreement modifying the Debentures to eliminate the conversion feature in
exchange for increasing the interest rate on the principal to 18% and the
payment of a quarterly fee of $935,000 for each quarter during which the
Debentures remain outstanding.  The stated maturity was shortened from March
2000 to September 30, 1998.  The Debentures, as modified, are secured by a Note
from NewCom to Aura in the original principal amount of $17 million (the "NewCom
Note") and Warrants for an aggregate of up to 2,500,000 shares of Common Stock
at an initial exercise price of $2.50 per share, subject to adjustment.  In
September 1998 the Company, the investors and NewCom reached an agreement-in-
principle to restructure the Debenture.  The proposed restructuring calls for an
initial cash payment by Aura to the investors and the issuance by NewCom of a $3
million convertible note, redeemable by 


                                      10
<PAGE>
 
NewCom under certain circumstances. The unpaid balance of the Debenture will
bear interest at 9% per annum and the remaining principle and interest will be
payable in six equal monthly installments. As part of the restructuring of the
Debenture NewCom and Aura have agreed to restructure the payment terms of the
remaining principal balance of the NewCom Note. The agreement-in-principle is
subject to certain terms and conditions, including the execution of definitive
documents on or before October 21, 1998, or such later date as is agreed to by
the parties.

     In the past the Company's cash flow generated from operations has not been
sufficient to completely fund its working capital needs. Accordingly, the
Company has also relied upon external sources of financing to maintain its
liquidity. In order to finance continued growth it will be necessary for the
Company to obtain additional working capital from external sources. The Company
is presently seeking additional sources of financing, including bank and equity
financing. No assurances can be provided that these funding sources will be
available at the times and in the amounts required. The ongoing financial crisis
in Asia may also have a negative effect on the Company's cash flow due to the
potential requirements for cash advances to Asian vendors in order to ensure an
adequate flow of product. However, this may be partially offset by reduced
prices from Asian suppliers.

     FORWARD LOOKING STATEMENTS

     The Company wishes to caution readers that important factors, in some
cases, have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for the third
quarter of Fiscal 1999, and beyond, to differ materially from those expressed in
any forward-looking statements made by, or on behalf of the Company.

     Such factors include, but are not limited to, the following risks and
contingencies: Changed business conditions in the consumer electronic and
automotive industries and the overall economy; increased marketing and
manufacturing competition and accompanying prices pressures; contingencies in
initiating production at new factories along with their potential
underutilization, resulting in production inefficiencies and higher costs and
start-up expenses and; inefficiencies, delays and increased depreciation costs
in connection with the start of production in new plants and expansions.

     Relating to the above are potential difficulties or delays in the
development, production, testing and marketing of products, including, but not
limited to, a failure to ship new products and technologies when anticipated.
There might exist a difficulty in obtaining raw materials, supplies, power and
natural resources and any other items needed for the production of Company and
another products, creating capacity constraints limiting the amounts of orders
for certain products and thereby causing effects on the Company's ability to
ship its products. Manufacturing economies may fail to develop when planned,
products may be defective and/or customers may fail to accept them in the
consumer marketplace.

     In addition to the above, risks and contingencies may exist as to the
amount and rate of growth in the Company's selling, general and administrative
expenses, and the impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, asset valuations and organizational
structures. Furthermore, any financing or other financial incentives by the
Company under or related to major infrastructure contracts could result in
increased bad debt or other expenses or fluctuation of profit margins from
period to period. The focus by some of the Company's businesses on any large
system order could entail fluctuating results from quarter to quarter.

     The effects of, and changes in, trade, monetary and fiscal policies, laws
and regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, such as trade restrictions
impose yet other constraints on any company statements. The cost and other
effects of legal and administrative cases and proceedings present another factor
which may or may not have an impact.



                                      11
<PAGE>
 
PART II - OTHER INFORMATION


ITEM 1    Legal Proceedings

          For information regarding pending legal proceedings, see Note 4 to the
          Company's Condensed Consolidated Financial Statements appearing
          elsewhere herein.

ITEM 4    Submission of Matters to Vote by Security Holders

          The Company's 1998 Annual Meeting of Shareholders was held on August
          19, 1998. At the Annual Meeting each of the company's nominees were
          elected to serve as directors of the Company. The election results are
          as follows:

<TABLE>
<CAPTION>
             Name                               For       Withheld    Abstain
             ----                               ---       --------    -------
<S>                                         <C>          <C>         <C>
Zvi (Harry) Kurtzman                        69,789,750     555,114   3,505,443
Arthur J. Schwartz                          70,065,941     278,923   3,505,443
Cipora Kurtzman Lavut                       69,012,232   1,332,632   3,505,443
Harvey Cohen                                69,494,992     849,872   3,505,443
Neal B. Kaufman                             70,066,501     278,363   3,505,443
Ashok Dewan                                 69,881,212     463,652   3,505,443
Salvador Diaz-Verson, Jr.                   70,019,994     324,870   3,505,443
Gerald S. Papazian                          70,086,647     258,217   3,505,443
Steven C. Veen                              69,785,530     559,334   3,505,443
Peter Liu                                   69,923,207     421,657   3,505,443
Robert Book                                 69,981,047     348,817   3,505,443
Major General Guy L. Hecker, Jr. (Ret.)     70,111,803     233,061   3,505,443
</TABLE>


          The shareholders in addition, approved a proposal submitted by a
          shareholder requesting the Board of Directors, prior to engaging in
          certain finance transactions, consider providing the existing
          shareholders of the Company an opportunity to invest in the Company on
          the terms being offered to private investors. The approval results are
          as follows:

<TABLE>
<CAPTION>
             Name                               For       Withheld    Abstain
             ----                               ---       --------    -------
<S>                                         <C>           <C>         <C>
Shareholder Proposal                        34,818,060     405,578    573,864
</TABLE>

ITEM 6    Exhibits and Reports on Form 8-K
 
          a)  Exhibits:

          See Exhibit Index

          b)  Reports On Form 8-K:

          None
 


                                      12
<PAGE>
 
                                  SIGNATURES
                                        

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                                    AURA SYSTEMS, INC.
                                       -----------------------------------------
                                                       (Registrant)



Date:   OCTOBER 15, 1998            By: /s/Steven C. Veen
        ----------------               -----------------------------------------
                                                    STEVEN C. VEEN
                                                 Senior Vice President
                                                Chief Financial Officer
                                    (Principal Financial and Accounting Officer)



                                      13
<PAGE>
 
                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>

Exhibit                                                               Sequential
Number                                                                  Page No.
<S>                                                                   <C> 
EX-27                        Financial Data Schedule
</TABLE>




                                      14