**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, 2005
            
            Commission
                File Number**000-17249**





**AURA
      SYSTEMS, INC.**


(Exact
      name of Registrant as specified in its charter)




**Delaware**
            
            **95-4106894**(State
                or other jurisdiction
            
            (I.R.S.
                Employerof
                incorporation or organization)
            
            Identification
                No.)





**2330
                Utah Avenue****El
                Segundo, California 90245**(Address
                of principal executive offices)





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





Former
      name, former address and former fiscal year, if changed since last report: **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 oNO x





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Act).




Yes
o No
x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





Yes
o No
      x





Indicate
      the number of shares outstanding of each of the issuer's classes of Common
      Stock, as of the latest practicable date.





Class
            
            Outstanding
                at September 30, 2005Common
                Stock, par value $0.005 per share
            
            439,074,474
                Shares














**AURA
      SYSTEMS, INC. AND SUBSIDIARIES**





**INDEX**


PART
                  I.
              
              FINANCIAL
                  INFORMATION
              
              3ITEM
                  1.
              
              Financial
                  Statements
              
              3Statement
                  Regarding Financial InformationCondensed
                  Consolidated Balance Sheets as of August 31, 2005(Unaudited)
                  and February 28, 2005
              
              4Condensed
                  Consolidated Statements of Operations for the Three and Six Months
                  Ended
                  August 31, 2005(Unaudited)
                  and 2004 (Unaudited)
              
              5Condensed
                  Consolidated Statements of Cash Flows for the Six Months Ended
                  August 31,
                  2005 (Unaudited) and 2004 (Unaudited)
              
              6Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              
              7ITEM
                  2.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              16ITEM
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              22ITEM
                  4.
              
              Controls
                  and Procedures
              
              22PART
                  II.
              
              OTHER
                  INFORMATION
              
              23ITEM
                  1
              
              Legal
                  Proceedings
              
              23ITEM
                  2
              
              Changes
                  in Securities
              
              23ITEM
                  3
              
              Defaults
                  on Senior Securities
              
              24ITEM
                  6.
              
              Exhibits
                  and Reports on Form 8-K
              
              24SIGNATURES
                  AND CERTIFICATIONS
              
              25




2




**AURA
      SYSTEMS, INC. AND SUBSIDIARIES**




**QUARTER
      ENDED AUGUST 31, 2005**




**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





The
      consolidated 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 consolidated financial statements and footnotes have been
      condensed and therefore do not contain all disclosures required by accounting
      principles generally accepted in the United States of America. However, the
      Company believes that the disclosures are adequate to make the information
      presented not misleading. These consolidated 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, 2005, as filed with the
      SEC
      (file number 000-17249).




3




**AURA
      SYSTEMS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**




**August
                31, 2005**
            
            **February
                28, 2005****(Unaudited)****Assets****Current
                assets:**Cash
                and cash equivalents
            
            $
            212,808
            
            $
            61,376Receivables,
                net
            
            
            255,658
            
            
            637,436Current
                inventories
            
            
            564,723
            
            
            802,003Other
                current assets
            
            
            529,863
            
            
            696,157**Total
                current assets**
            
            
            1,563,052
            
            
            2,196,972Property
                and equipment, at cost
            
            
            13,787,996
            
            
            13,839,286Less
                accumulated depreciation and amortization
            
            
            7,354,317
            
            
            7,250,240**Net
                property and equipment**
            
            
            6,433,679
            
            
            6,588,996Non-current
                inventories
            
            
            4,655,060
            
            
            4,519,809Total
                assets
            
            $
            12,651,791
            
            $
            13,305,777**Liabilities
                and Stockholder's Deficit****Current
                liabilities:**Accounts
                payable
            
            $
            3,892,128
            
            $
            3,322,137Notes
                payable
            
            
            9,876,110
            
            
            8,730,982Convertible
                notes
            
            
            5,975,345
            
            
            5,686,527Derivative
                liability
            
            
            100,072
            
            
            16,254,502Accrued
                expenses
            
            
            2,739,245
            
            
            2,376,346Deferred
                income
            
            
            164,625
            
            
            164,625**Total
                current liabilities**
            
            
            22,747,525
            
            
            36,535,119Minority
                interest in consolidated subsidiary
            
            
            481,475
            
            
            653,891COMMITMENTS
                AND CONTINGENCIES**Stockholders'
                deficit**Series
                A Convertible, Redeemable Preferred stock par value $0.005 per share
                and
                additional paid in capital.  1,500,000 shares authorized, 591,110
                shares issued and outstanding at August 31 and February 28,
                2005
            
            
            2,956
            
            
            2,956Series
                B Convertible, preferred stock, par value $0.005 per share, 2,675,491
                and
                2,650,798 shares issued and outstanding at August 31, 2005 and February
                28, 2005
            
            
            9,980
            
            
            9,857Common
                stock par value $0.005 per share and additional paid in capital. 
                500,000,000 shares authorized, 439,074,474 issued and outstanding
                at
                August 31 and February 28, 2005.
            
            
            2,195,301
            
            
            2,195,301Committed
                common stock
            
            
            3,102,958
            
            
            3,102,958Additional
                paid-in capital
            
            
            316,785,992
            
            
            316,662,653Accumulated
                deficit
            
            
            (332,674,396
            )
            
            (345,856,958
            )Total
                stockholders’ deficit
            
            
            (10,577,209
            )
            
            (23,883,233
            )Total
                liabilities and stockholders’ deficit
            
            $
            12,651,791
            
            $
            13,305,777




See
      accompanying notes to these unaudited condensed consolidated financial
      statements.




4




**AURA
      SYSTEMS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**THREE
      AND SIX MONTHS ENDED AUGUST 31, 2005 AND 2004**


**(Unaudited)**





**Three
                Months**
            
            **Six
                Months****2005**
            
            **2004**
            
            **2005**
            
            **2004****Net
                Revenues**
            
            $
            274,007
            
            $
            599,443
            
            $
            804,710
            
            $
            1,285,277Cost
                of goods
            
            
            102,058
            
            
            129,419
            
            
            297,110
            
            
            398,417**Gross
                Profit**
            
            
            171,949
            
            
            470,024
            
            
            507,600
            
            
            886,860**Expenses**Engineering,
                research and development expenses
            
            
            270,137
            
            
            633,498
            
            
            786,806
            
            
            1,179,128Selling,
                general and administrative
            
            
            1,138,962
            
            
            1,557,898
            
            
            2,207,871
            
            
            2,920,629Litigation
                settlements
            
            
            -
            
            
            2,088,758
            
            
            -
            
            
            2,088,758Total
                costs and expenses
            
            
            1,409,099
            
            
            4,280,154
            
            
            2,994,677
            
            
            6,188,515**Loss
                from operations**
            
            
            (1,237,150
            )
            
            (3,810,130
            )
            
            (2,487,077
            )
            
            (
                5,301,655
            )**Other
                (income) and expense**Interest
                expense, net
            
            
            402,025
            
            
            7,848,415
            
            
            719,650
            
            
            8,992,823Change
                in warrant liability
            
            
            (19,955,887
            )
            
            -
            
            
            (16,154,430
            )
            
            -Other
                (income) expense, net
            
            
            (55,317
            )
            
            (14,941
            )
            
            (62,442
            )
            
            (28,295
            )**Income
                (Loss) before minority interest**
            
            
            18,372,029
            
            
            (11,643,604
            )
            
            13,010,145
            
            
            (14,266,183
            )Minority
                interest in net income of consolidated subsidiary
            
            
            (73,473
            )
            
            47,133
            
            
            (172,415
            )
            
            (3,970
            )**Net
                Income (Loss)**
            
            $
            18,445,502
            
            $
            (11,690,737
            )
            $
            13,182,560
            
            $
            (14,262,213
            )**Basic
                and diluted income (loss) per share****Total
                basic and diluted income (loss) per share**
            
            $
            0.04
            
            $
            (0.027
            )
            $
            0.03
            
            $
            (0.033
            )**Weighted
                average shares used to****compute
                basic and diluted income (loss) per share**
            
            
            439,074,474
            
            
            430,923,150
            
            
            439,074,474
            
            
            430,923,150




See
      accompanying notes to these unaudited condensed consolidated financial
      statements.




5





**AURA
      SYSTEMS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE SIX MONTHS ENDED AUGUST 31, 2005 AND 2004**


**(Unaudited)**





**2005**
            
            **2004****Net
                cash used in operations**
            
            $
            (1,637,642
            )
            $
            (
                1,845,176
            )**Investing
                activities:**Payments
                on investor receivable
            
            
            231,666
            
            
            —**Financing
                activities:**Debtor
                in possession financing
            
            
            1,090,476
            
            
            -Issuance
                of debt
            
            
            116,928
            
            
            150,000Repayment
                of debt
            
            
            (62,274
            )
            
            (
                93,995
            )Issuance
                of convertible notes
            
            
            288,815
            
            
            1,730,000Net
                proceeds from sale of Series B preferred stock
            
            
            123,463
            
            
            —**Net
                cash provided by financing activities:**
            
            
            1,557,408
            
            
            2,174,973**Net
                increase (decrease) in cash**
            
            
            151,432
            
            
            (59,171
            )Cash
                and cash equivalents at beginning of period
            
            
            61,376
            
            
            83,200**Cash
                and cash equivalents at end of period**
            
            $
            212,808
            
            $
            24,029Supplemental
                disclosures of cash flow informationCash
                paid during the period for:Interest
            
            $
            184,462
            
            $
            164,027Income
                Tax
            
            $
            -
            
            $
            -





Unaudited
      supplemental disclosure of noncash investing and financing
      activities:




During
      the six months ended August 31, 2004, we:




·
            issued
                $124,810 of convertible notes payable in satisfaction of $124,810
                in
                contractual obligations arising from the sale of the convertible
                notes
                payable.




See
      accompanying notes to these unaudited condensed consolidated financial
      statements.




6





**AURA
      SYSTEMS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**AUGUST
      31, 2005**


**(Unaudited)**




**1)**  **Basis
      of Presentation**




The
      condensed consolidated financial statements include the accounts of Aura
      Systems, Inc. and subsidiaries ("the Company").  All 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 normal recurring adjustments)
      and reclassifications for comparability necessary to present fairly the
      financial position of Aura Systems, Inc. and subsidiaries at August 31, 2005
      and
      the results of its operations for the six months ended August 31, 2005 and
      2004.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amount of assets and
      liabilities and disclosure of contingent assets and liabilities as of the date
      of the financial statements and the reported amounts of revenues and expenses
      during the reported period.  Actual results could differ from those
      estimates.




**2)**  **Going
      Concern**




In
      connection with the audit of its consolidated financial statements for the
      year
      ended February 28, 2005, the Company received a report from its independent
      auditors that includes an explanatory paragraph describing uncertainty as to
      the
      Company’s ability to continue as a going concern.  Except as otherwise
      disclosed, the condensed consolidated financial statements have been prepared
      on
      the basis that it is a going concern, which contemplates the realization of
      assets and satisfaction of liabilities in the normal course of business. 
The Company’s consolidation and reduction of the scope of its operations has
      resulted in several writedowns of assets, which have occurred over time as
      the
      Company determines, based on its current information, that such asset is
      impaired.  Further writedowns may occur.




The
      cash flow generated from the Company's operations to date has not been
      sufficient to fund its working capital needs, and the Company does not expect
      that current operating cash flow will be sufficient to fund its working capital
      needs. In the past, in order to maintain liquidity, the Company has relied
      upon
      external sources of financing, principally equity financing and private and
      bank
      indebtedness.  The Company has no bank line of credit.




The
      Company is currently in default on many of its payment obligations and needs
      to
      restructure its existing obligations.  Management is seeking to raise
      financing for the Company and to restructure the Company’s obligations but there
      can be no assurance that the Company will be successful.




On
      June
      24, 2005 we filed for reorganization under Chapter 11 of the U.S. Bankruptcy
      Code, in the United States Bankruptcy Court, Central District of California,
      (Case Number LA 05-24550-SB). We secured a Debtor in Possession (“DIP”) loan
      from Blue Collar Films LLC (“BCF”) for one million dollars and secured an
      additional $1.2 million DIP loan from AGP Lender LLC. In addition a group of
      individual investors provided an additional $1.16 million in DIP financing.
      We
      submitted a reorganization plan that was approved by the court and voted and
      approved by the DIP lenders, the secured creditors, the unsecured creditors,
      the
      shareholders and the new money investors. Under the reorganization plan (i)
      the
      secured creditor retained $2.5 million in a secured note payable over 48 months
      at 7% annual interest with the first payment starting 12 months after the
      reorganization, (ii) the Series B Preferred Stock holders received new common
      shares calculated by dividing the total cash invested in the Series B Placement
      by $3.37, (iii) the Series A Preferred Stock holders converted their 1.8 Series
      A Preferred Stock for one new common share, (iv) the common shareholders
      converted 338 of their shares for one new share, and (v) the DIP loans converted
      their loans into approximately 6.07 million new shares of common stock, and
      (vi)
      all the unsecured creditors received new shares of common stock valued at one
      share per $1.75 in claim. An additional 5.89 million shares of common stock
      were
      issued for the new money and reorganization related fees.  254,127
      additional shares were issued to shareholders to settle their claims in excess
      of the bankruptcy court approval.




7




All
      of
      the outstanding litigation and disputes were settled during the bankruptcy.
      The
      real estate was sold to an unrelated third party in December 2005 for gross
      proceeds of $8,750,000. After satisfaction of the mortgage liabilities and
      payment of the costs of the sale, approximately $2.9 million was due us. From
      this amount, $1.9 million was paid to the minority shareholder, approximately
      $470,000 was used to satisfy outstanding legal bills, and the balance of
      $595,000 was received by the Company in March of 2006. All disputes regarding
      the real estate were settled.




We
      emerged from the Chapter 11 effective January 31, 2006.




3) Summary
          of Significant Accounting Policies





Principles
      of Consolidation




The
      consolidated financial statements include the accounts of Aura and our
      subsidiary, Aura Realty, Inc.. Investments in affiliated companies are accounted
      for by the equity or cost method, as appropriate. Significant inter-company
      amounts and transactions have been eliminated in consolidation.




Revenue
      Recognition





The
      Company’s revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue.




We
      recognize revenue for product sales upon shipment and when title is transferred
      to the customer. When Aura performs the installation of the product, revenue
      and
      cost of sales are recognized when the installation is complete. We have in
      the
      past earned a portion of our revenues from license fees and recorded those
      fees
      as income when we fulfilled our obligations under the particular
      agreement.




Cash
      and
      Cash Equivalents





Cash
      and
      cash equivalents include cash in hand and cash in time deposits, certificates
      of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less.




Accounts
      Receivable




Accounts
      receivable consist primarily of amounts due from customers. We have provided
      for
      an allowance for doubtful accounts, which management believes to be sufficient
      to account for all uncollectible amounts.




Inventories




Inventories
      are valued at the lower of cost (first-in, first-out) or market. Due to
      continuing lower than projected sales, we are holding inventories in excess
      of
      what we expect to sell in the next fiscal year.




Property,
      Plant, and Equipment




Property,
      plant, and equipment, including leasehold improvements, are recorded at cost,
      less accumulated depreciation and amortization. Depreciation is provided using
      the straight-line method over the estimated useful lives of the respective
      assets as follows:




Buildings
            
            
            40
                yearsMachinery
                and equipment
            
            
            5
                to 10 yearsFurniture
                and fixtures
            
            
            7
                years




8




Improvements
      to leased property are amortized over the lesser of the life of the lease or
      the
      life of the improvements. Amortization expense on assets acquired under capital
      leases is included with depreciation and amortization expense on owned
      assets.




Maintenance
      and minor replacements are charged to expense as incurred. Gains and losses
      on
      disposals are included in the results of operations.




Minority
      Interest





Minority
      interest represents the proportionate share of the equity of the consolidated
      subsidiary owned by our minority stockholders in that subsidiary.





Income
      Taxes




We
      utilize SFAS No. 109, "Accounting for Income Taxes," which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.




Estimates




The
      preparation of financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period. Actual results could differ from those estimates.




Recently
      Issued Accounting Pronouncements





In
      December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
      an
      Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
      companies to recognize in the statement of operations the grant- date fair
      value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company's second quarter of fiscal 2006.
      The Company is in process of evaluating the impact of this pronouncement on
      its
      financial statements.




In
      December 2004, the FASB issued SFAS No. 153, entitled Exchanges of Nonmonetary
      Assets -- An Amendment of APB Opinion No.29. SFAS No. 153 amends Opinion 29
      to
      eliminate the exception for nonmonetary exchanges of nonmonetary assets that
      do
      not have commercial substance. A nonmonetary exchange has commercial substance
      if the future cash flows of the entity are expected to change significantly
      as a
      result of the exchange. The adoption of SFAS 153 did not impact the consolidated
      financial statements.





In
      December 2004, the FASB issued SFAS No. 123 (Revised), entitled Share-Based
      Payment. This revised Statement eliminates the alternative to use APB Opinion
      No. 25's intrinsic value method of accounting that was provided in SFAS No.
      123
      as originally issued. Under Opinion 25, issuing stock options to employees
      generally resulted in recognition of no compensation cost. This Statement
      requires entities to recognize the cost of employee services received in
      exchange for awards of equity instruments based on the grant-date fair value
      of
      those awards. For public companies that file as a small business issuer, this
      Statement is effective as of the beginning of the first interim or annual
      reporting period that begins after December 15, 2005. The adoption of SFAS
      123
      (Revised) will not impact the consolidated financial statements as the Company
      has not granted any equity instruments to employees.





In
      May
      2005, the FASB issued SFAS No. 154, entitled Accounting Changes and Error
      Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3.
      This
      Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement
      No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
      the requirements for the accounting for and reporting of a change in accounting
      principle. This Statement applies to all voluntary changes in accounting
      principle. It also applies to changes required by an accounting pronouncement
      in the
      unusual instance that the pronouncement does not include specific transition
      provisions. Opinion 20 previously required that most voluntary changes in
      accounting principle be recognized by including in net income of the period
      of
      the change the cumulative effect of changing to the new accounting principle.
      This Statement requires retrospective application to prior periods' financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. This Statement defines retrospective application as the application
      of a
      different accounting principle to prior accounting periods as if that principle
      had always been used or as the adjustment of previously issued financial
      statements to reflect a change in the reporting entity. This Statement also
      redefines restatement as the revising of previously issued financial statements
      to reflect the correction of an error. The adoption of SFAS 154 did not impact
      the consolidated financial statements.




9





In
      February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
      Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities".  SFAS No. 155, permits fair value remeasurement for any
      hybrid financial instrument that contains an embedded derivative that otherwise
      would require bifurcation, clarifies which interest-only strips and
      principal-only strips are not subject to the requirements of SFAS No. 133,
      establishes a requirement to evaluate interest in securitized financial assets
      to identify interests that are freestanding derivatives or that are hybrid
      financial instruments that contain an embedded derivative requiring bifurcation,
      clarifies that concentrations of credit risk in the form of subordination are
      not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition
      on the qualifying special-purpose entity from holding a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument.  This statement is effective for all financial
      instruments acquired or issued after the beginning of the Company's first fiscal
      year that begins after September 15, 2006.  The Company has not evaluated
      the impact of this pronouncement in its financial statements.





In
      March
      2006 FASB issued SFAS 156 'Accounting for Servicing of Financial Assets' this
      Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities, with respect to the
      accounting for separately recognized servicing assets and servicing liabilities.
      This Statement:




1.
      Requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract.




2.
      Requires all separately recognized servicing assets and servicing liabilities
      to
      be initially measured at fair value, if practicable.




3.
      Permits an entity to choose 'Amortization method' or 'Fair value measurement
      method' for each class of separately recognized servicing assets and servicing
      liabilities.




4.
      At its
      initial adoption, permits a one-time reclassification of available-for-sale
      securities to trading securities by entities with recognized servicing rights,
      without calling into question the treatment of other available-for-sale
      securities under Statement 115, provided that the available-for-sale securities
      are identified in some manner as offsetting the entity's exposure to changes
      in
      fair value of servicing assets or servicing liabilities that a servicer elects
      to subsequently measure at fair value.




5.
      Requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at fair value in the statement of financial position
      and
      additional disclosures for all separately recognized servicing assets and
      servicing liabilities.




This
      Statement is effective as of the beginning of the Company's first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not have a significant impact on the consolidated financial
      statements.





In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.




10





In
      July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
      Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an
      Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 seeks to reduce
      the diversity in practice associated with certain aspects of measuring and
      recognition in accounting for income taxes. In addition, FIN 48 requires
      expanded disclosure with respect to the uncertainty in income taxes and is
      effective as of the beginning of the 2008 fiscal year. Management is currently
      evaluating the effect of this pronouncement on financial
      statements.





In
      September 2006, FASB issued SFAS No. 158 “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
      No. 87, 88, 106, and 132(R)”. This Statement improves financial reporting by
      requiring an employer to recognize the over funded or under funded status of
      a
      defined benefit postretirement plan (other than a multiemployer plan) as an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income of a business entity or changes in unrestricted net assets
      of a not-for-profit organization. This Statement also improves financial
      reporting by requiring an employer to measure the funded status of a plan as
      of
      the date of its year-end statement of financial position, with limited
      exceptions. An employer with publicly traded equity securities is required
      to
      initially recognize the funded status of a defined benefit postretirement plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after December 15, 2006. An employer without publicly traded equity securities
      is required to recognize the funded status of a defined benefit postretirement
      plan and to provide the required disclosures as of the end of the fiscal year
      ending after June 15, 2007. However, an employer without publicly traded equity
      securities is required to disclose the following information in the notes to
      financial statements for a fiscal year ending after December 15, 2006, but
      before June 16, 2007, unless it has applied the recognition provisions of this
      Statement in preparing those financial statements:




·
            A
                brief description of the provisions of this Statement




·
            The
                date that adoption is required




·
            The
                date the employer plans to adopt the recognition provisions of this
                Statement, if earlier.




The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. Management is currently evaluating
      the effect of this pronouncement on financial statements.




In
      February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
      years beginning after November 15, 2007. Early adoption is permitted subject
      to
      specific requirements outlined in the new Statement. Therefore, calendar-year
      companies may be able to adopt FAS 159 for their first quarter 2007 financial
      statements.




The
      new
      Statement allows entities to choose, at specified election dates, to measure
      eligible financial assets and liabilities at fair value that are not otherwise
      required to be measured at fair value. If a company elects the fair value option
      for an eligible item, changes in that item's fair value in subsequent reporting
      periods must be recognized in current earnings. FAS 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities. Management is currently evaluating the effect of this pronouncement
      on financial statements.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements”. This Statement amends ARB 51 to establish
      accounting and reporting standards for the noncontrolling (minority) interest
      in
      a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
      a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements. SFAS No. 160 is effective for the Company’s fiscal year
      beginning October 1, 2009. Management is currently evaluating the effect of
      this
      pronouncement on financial statements.




11





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
      Statement replaces SFAS No. 141, Business Combinations. This Statement retains
      the fundamental requirements in Statement 141 that the acquisition method of
      accounting (which Statement 141 called the purchase method) be used for all
      business combinations and for an acquirer to be identified for each business
      combination. This Statement also establishes principles and requirements for how
      the acquirer: a) recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, and any noncontrolling
      interest in the acquiree; b) recognizes and measures the goodwill acquired
      in
      the business combination or a gain from a bargain purchase and c) determines
      what information to disclose to enable users of the financial statements to
      evaluate the nature and financial effects of the business combination. SFAS
      No.
      141(R) will apply prospectively to business combinations for which the
      acquisition date is on or after Company’s fiscal year beginning October 1, 2009.
      While the Company has not yet evaluated this statement for the impact, if any,
      that SFAS No. 141(R) will have on its consolidated financial statements, the
      Company will be required to expense costs related to any acquisitions after
      September 30, 2009.




**4)**  **Inventories**




Inventories,
      stated at the lower of cost (first in, first out) or market, consist of the
      following:




August
                31,
              2005
            
            February
                28,
              2005(unaudited)Raw
                materials
            
            $
            3,741,844
            
            $
            3,720,204Finished
                goods
            
            
            5,001,366
            
            
            5,639,859Reserved
                for potential product obsolescence
            
            
            (3,523,427
            )
            
            (4,038,047
            )5,219,783
            
            
            5,321,812Non-current
                portion
            
            
            4,655,060
            
            
            4,519,809Current
                portion
            
            $
            564,723
            
            $
            802,003




Inventories
      consist primarily of components and completed units for the Company's AuraGen
      product.




We
      do not expect to realize all of our inventories within the 12-month period
      ending August 31, 2006.  Because of this, we have assessed the net
      realizability of these assets, the proper classification of the inventory,
      and
      the potential obsolescence of inventory.  The net inventories as of August
      31, 2005 and February 28, 2005 which are not expected to be realized within
      a
      12-month period have been reclassified as long term.  The Company has also
      recorded a reserve for obsolescence of $3,523,427 and $4,038,047 at August
      31,
      2005 and February 28, 2005.




5)
      Property, Plant & Equipment




Property,
      plant, and equipment at August 31, 2005 and February 28, 2005 consisted of
      the
      following:




August
                31,
              2005
            
            February
                28,
              2005Land
            
            $
            3,187,997
            
            $
            3,187,997Buildings
            
            
            6,408,796
            
            
            6,408,796Machinery
                and equipment
            
            
            1,747,245
            
            
            1,798,485Furniture
                and fixtures
            
            
            2,308,023
            
            
            2,308,023Leasehold
                improvements
            
            
            135,935
            
            
            135,93513,787,996
            
            
            13,839,286Less
                accumulated depreciation and amortization
            
            
            7,354,317
            
            
            7,250,240Property,
                plant and equipment, net
            
            $
            6,433,679
            
            $
            6,588,996




12




Depreciation
      and amortization expense was $42,257, for the six month period ended August
      31,
      2005, and $416,161 for the year ended February 28, 2005.




6)
      Accrued expenses




Accrued
      expenses at August 31, 2005 and February 28, 2005 consisted of the
      following:




August
                31,
              2005
            
            February
                28,
              2005Accrued
                payroll and related expenses
            
            $
            217,455
            
            $
            352,836Accrued
                interest
            
            
            1,209,260
            
            
            856,662Customer
                advances
            
            
            335,208
            
            
            343,081Accrued
                accounting fees
            
            
            233,963
            
            
            170,000Accrued
                insurance
            
            
            -
            
            
            95,251Accrued
                dividends
            
            
            525,377
            
            
            525,377Other
            
            
            217,982
            
            
            33,139Total
            
            $
            2,739,245
            
            $
            2,376,346




**7)**  **Notes
      Payable and Other Liabilities**




Notes
      payable and other liabilities consist of the following:




August
                31,
              2005
            
            February
                28,
              2005(unaudited)Convertible
                notes payable (a)
            
            $
            5,350,342
            
            $
            5,061,527Convertible
                notes payable (b)
            
            
            625,000
            
            
            625,000Notes
                payable - buildings (c)
            
            
            4,893,558
            
            
            4,838,904Note
                payable - related party (d)
            
            
            1,149,525
            
            
            1,149,525Litigation
                payable (e)
            
            
            2,742,553
            
            
            2,742,553Notes
                payable - debtor in possession
            
            
            1,090,476
            
            
            -15,851,455
            
            
            14,417,509Less:
                current portion
            
            
            15,851,455
            
            
            14,417,509Long-term
                portion
            
            $
            -
            
            $
            -





(a)
            Represents
                secured notes payable (the "Secured Notes") on June 15, 2004, bearing
                interest at 10% per annum and convertible at the option of the holder
                into
                new debt or equity securities of the Company at a 20% discount to
                the best
                terms by which such new debt or equity is sold to any new investor.
                The
                Secured Notes may be prepaid on notice at a 15% premium. Repayment
                of the
                Secured Notes is secured by substantially all the assets of the Company
                (with limited exceptions).In
                connection with the Secured Notes issued in fiscal 2004, primarily
                as
                inducements to the lender to continue to provide interim funding,
                we
                agreed to issue warrants to purchase an aggregate of 3,200,000 shares
                of
                common stock at a price per share of $0.11, exercisable through January
                7,
                2011.  The value of these warrants was recorded as interest expense
                in fiscal 2004.  In April 2004, we issued additional warrants (with a
                net exercise feature) to purchase an aggregate of 12,369,878 shares
                of
                common stock at a price per share of $0.024 to the same lenders. 
                These warrants were valued at $674,158 and have been recorded as
                interest
                expense in the accompanying financial statements. As of February
                28, 2005,
                we have reclassified the value of the warrants to a derivative liability.
                (See note 8)




13




Repayment
                of the Secured Notes is secured by substantially all of our assets
                (with
                limited exceptions).Between
                June 1 and August 20, 2004, we received $760,000 of additional interim
                funding from certain holders of Secured Notes on substantially the
                same
                terms as those for the Secured Notes issued at May 31,
                2004.).During
                the six months ended August 31, 2005, we received $288,817 of additional
                interim funding from certain holders of Secured Notes on substantially
                the
                same terms as those for the Secured Notes issued at May 31,
                2004.(b)
            Convertible
                notes payable carry an 8% interest rate and are convertible into
                common
                stock at various conversion rates (the "8% Convertible Notes"). 
                These notes were due and payable during the fourth quarter of fiscal
                2003.(c)
            Notes
                payable-buildings consist of a 1st Trust Deed on two buildings in
                California bearing interest at the rate of 7.625%.  A final balloon
                payment is due in Fiscal 2009.  In April 2003, we defaulted on these
                notes payable and, in June 2004, cured such defaults.During
                the period ended August 31, 2005, $116,928 in fees and late charges
                were
                added to the balance of the note.(d)
            Notes
                payable - related parties consist of two separate notes: a $1,000,000
                note
                payable, dated December 1, 2002, which was entered into in connection
                with
                the sale of a minority interest in Aura Realty, as more fully described
                in
                our Form 10-K for the year ended February 28, 2005 as filed with
                the SEC
                (the “$1M Note”) and a $150,000 demand note, dated August 6, 2004, which
                was issued in exchange for a $150,000 cash advance from an employee
                of the
                Company (the “$150K Note”).(e)
            The
                  litigation payable represents the legal settlements entered into
                  by Aura
                  with various parties.  These settlements call for payment terms with
                  8% interest rate to the plaintiffs through fiscal 2004. We are
                  in default
                  with respect to payments required under these
                  settlements.Litigation
                payable also comprises of the balance of the promissory note payable
                as
                part of the Mutual Settlement Agreement and Release. This was a litigation
                between Aries Group and the Company wherein the Aries Group had alleged
                among other things, the breach of numerous provisions of the Termination
                of Employment Agreements.




**8)**  **Capital**




During
      the six months ended August 31, 2005, we issued 24,693 shares of Series B
      Convertible Preferred Stock for consideration of $123,463. We did not issue
      shares of Common Stock or Preferred Stock during the six months ended August
      31,
      2004.




In
      April 2004, we issued additional warrants (with a net exercise feature) to
      purchase an aggregate of 12,369,878 shares of common stock at a price per share
      of $0.024 to the lenders under the Secured Notes (see Note 7) primarily as
      an
      inducement to the lender to continue to provide interim funding.  These
      warrants were valued at $674,158 and have been recorded as interest expense
      in
      the accompanying financial statements.




Warrants




As
      of
      February 29, 2004, the aggregate number of outstanding options, warrants, and
      common share equivalents was significantly in excess of the authorized but
      unissued number of shares of our common stock. Management intends to seek
      shareholder approval of an increase in the Company's authorized shares
      sufficient to satisfy all existing commitments and create available shares
      for
      potential future investments. However, such approval has not been granted.
      Hence, the management determined that the value of the warrants is required
      to
      be classified as a liability under the provisions of EITF 00-19 - Accounting
      for
      Derivative Financial Instruments Indexed To and Potentially Settled In a
      Company's Own Stock. As of February 28, 2005, we have reclassified the value
      of
      the warrants to a derivative liability. The derivative liability as of August
      31, 2005 amounted to $100,072.




14




Activity
      in issued and outstanding warrants was as follows:




Number
                of Shares
            
            Exercise
                PricesOutstanding,
                February 28, 2004
            
            
            44,247,312
            
            $
            0.05
                - 2.54Issued
            
            
            150,000,000
            
            $
            0.05
                - 0.15Exercised
            
            
            -
            
            $
            -Expired
            
            
            -
            
            $
            -Outstanding,
                February 29, 2005
            
            
            194,243,312
            
            $
            0.02
                - 2.54Issued
            
            
            -
            
            $
            -Exercised
            
            
            -
            
            $
            -Expired
            
            
            -
            
            $
            -Outstanding
                August 31, 2005
            
            
            194,243,312
            
            $
            0.02
                - 2.54




**9)**  **Significant
      Customers**




In
      the
      six months ended August 31, 2005, we had no customers that exceeded 10% of
      our
      sales.




In
      the
      six months ended August 31, 2004, we sold AuraGen related products to one
      significant customer for a total of approximately $440,000, or 34% of net
      revenues. This customer is not related to or affiliated with us.




At
      August
      31, 2004, we held accounts receivable from three significant customers for
      a
      total of approximately $145,000, or 59% of net receivables. None of these
      customers are related to or affiliated with us.




**10)** **Contingencies**




We
      are engaged in certain material legal proceedings. Provisions have been made
      in
      the financial statements for all judgments and settlements noted therein, and
      as
      otherwise stated in such discussion.




***Barovich/Chiau
      et. al. v. Aura Systems, Inc. et. al. (Case No. CV
      -95-3295).***




As
      previously reported in our fiscal 2000 report on Form 10-K, we settled
      shareholder litigation in the referenced matter in January 1999. On November
      20,
      1999, the parties entered into an Amended Stipulation of Settlement, requiring
      that we make payment of $2,260,000 (plus interest) in thirty-six equal monthly
      installments of $70,350. On October 22, 2002, after we had failed to make
      certain monthly payments, Plaintiffs applied for and obtained a judgment against
      us for $935,350, representing the balance due. We have subsequently made only
      two monthly payments of $70,350 each, reducing the amount owed to $794,650
      (plus
      interest) as of February 28, 2005. Subsequent to year end, the bankruptcy court
      (see footnote 18) approved the settlement of this claim in the amount of
      approximately $820,000, to be satisfied by the issuance of approximately 465,000
      shares of common stock in the recapitalized company. Plaintiffs appealed the
      settlement claiming they are a secured creditor entitled to full payment in
      cash
      over a period of five years. The appellate court upheld the settlement
      provisions, and Plaintiffs have appealed this decision. The appeal is
      pending.





*Moshe
      and Maimon Litigation*




In
      the
      first quarter of the fiscal year 2006, we filed a suit against Yair Ben Moshe
      and David Maimon, Aura Systems, Inc. vs. David Maimon and Yair Ben Moshe, to
      enforce their Series B Placement subscription obligations in the amount of
      approximately $3.2 million. The failure by Yair Ben Moshe and David Maimon
      to
      pay the Series B placement subscription price when required by the terms of
      their promissory notes caused severe financial pressure on us that triggered
      numerous payment demands which we were unable to meet. The suit was dismissed
      during the bankruptcy proceedings as part of a settlement agreement.





15





*Chapter
      11 Reorganization*




On
      June
      24, 2005 we filed for reorganization under Chapter 11 of the U.S. Bankruptcy
      Code, in the United States Bankruptcy Court, Central District of California,
      (Case Number LA 05-24550-SB). We secured a Debtor in Possession (“DIP”) loan
      from Blue Collar Films LLC (“BCF”) for one million dollars and secured an
      additional $1.2 million DIP loan from AGP Lender LLC. In addition a group of
      individual investors provided an additional $1.16 million in DIP financing.
      We
      submitted a reorganization plan that was approved by the court and voted and
      approved by the DIP lenders, the secured creditors, the unsecured creditors,
      the
      shareholders and the new money investors. Under the reorganization plan (i)
      the
      secured creditor retained $2.5 million in a secured note payable over 48 months
      at 7% annual interest with the first payment starting 12 months after the
      reorganization, (ii) the Series B Preferred Stock holders received new common
      shares calculated by dividing the total cash invested in the Series B Placement
      by $3.37, (iii) the Series A Preferred Stock holders converted their 1.8 Series
      A Preferred Stock for one new common share, (iv) the common shareholders
      converted 338 of their shares for one new share, and (v) the DIP loans converted
      their loans into approximately 6.07 million new shares of common stock, and
      (vi)
      all the unsecured creditors received new shares of common stock valued at one
      share per $1.75 in claim. An additional 5.89 million shares of common stock
      were
      issued for the new money and reorganization related fees. 254,127 additional
      shares were issued to shareholders to settle their claims in excess of the
      bankruptcy court approval.




All
      of
      the outstanding litigation and disputes were settled during the bankruptcy.
      In
      December, 2005, we sold the buildings owned by Aura Realty to an unrelated
      third
      party for total consideration of $8,750,000. In conjunction with the sale,
      all
      outstanding claims related to the buildings were settled. After satisfying
      the
      mortgage liability, including late fees and penalties, with the lender, there
      were net proceeds of $2,898,657 due to us from the sale. Of this amount,
      $1,900,000 was used to settle claims with the minority shareholders, $595,000
      was received by us in March of 2006, and the balance was used to pay legal
      fees
      and miscellaneous expenses associated with the sale, pursuant to the Court
      order
      approving the settlement and mutual release agreement.




We
      emerged from the Chapter 11 effective January 31, 2006.




*Other
      Litigation*




During
      the three months ended May 31, 2005, we were engaged in numerous legal actions
      by creditors seeking payment of sums owed. Actions by the parties to these
      obligations to enforce their rights to collect the amounts due could require
      us
      to cease operations. Our filing of the Chapter 11 bankruptcy proceeding in
      June
      2005 acted as an automatic stay of all pending litigation as of the filing
      date
      without further approval of the Bankruptcy Court .




*Capital
      Transactions*




In
      the
      year ended February 28, 2006, we issued 24,282,710 shares of common stock as
      follows:




·
            1,134,000
                shares upon conversion of $2,900,000 of secured debt




·
            2,766,786
                shares for administrative claims arising out of the bankruptcy
                filing




·
            837,375
                shares as penalty shares for failure to timely file a registration
                statement




·
            4,611,247
                shares in satisfaction of $8,125,939 of unsecured
                debt




·
            1,300,172
                shares in exchange for the old common
                stock




·
            3,573,530
                shares for cancelled preferred
                stock




·
            6,065,699
                shares for DIP financing




·
            3,349,500
                shares for new money contribution




·
            644,401
                shares issued for legal settlements




In
      the
      year ended February 28, 2007, we issued 4,412,928 shares of common stock for
      net
      proceeds of $3,965,156.


In
      the
      nine months ended November 30, 2007, we issued 5,614,650 shares of common stock
      for net proceeds of $5,377,08. We also issued 183,532 shares of common stock
      upon conversion of $183,532 of secured notes payable.





**ITEM
      2.**  **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**




This
      Form
      10-Q report may contain forward-looking statements which involve risks and
      uncertainties.  Such forward-looking statements include, but are not
      limited to, statements regarding future events and our plans and
      expectations.  Our actual results may differ significantly from the results
      discussed in forward-looking statements as a result of a number of risks and
      uncertainties, including our ability to obtain positive cash flow from
      operations, our ability to obtain additional financing to fund our operations,
      our ability to restructure the terms of our existing indebtedness, and our
      ability to increase the demand for our products. We expressly disclaim any
      obligation or undertaking to release publicly any updates or revisions to any
      forward-looking statements contained herein to reflect any change in our
      expectations or any events, conditions or circumstances on which any such
      statement is based, except to the extent require d
      by
      law.




16




**Overview**





We
      design, assemble and sell the AuraGen ® ,
      our
      patented mobile power generator that uses the engine of a vehicle to generate
      power. The AuraGen ® delivers
      on-location, plug-in electricity for any end use, including industrial,
      commercial, recreational and military applications. We began commercializing
      the
      AuraGen ® in late
      1999. To date, AuraGen ® units
      have been sold to more than 500 customers in more than 10 industries, including
      recreational, utilities, telecommunications, emergency/rescue, public works,
      catering, oil and gas, transportation, government and the military.




We
      have
      not yet achieved a level of AuraGen ® sales
      sufficient to generate positive cash flow. Accordingly, we have depended on
      repeated infusions of cash in order to maintain liquidity as we have sought
      to
      develop sales. During fiscal 2002 through fiscal 2004, we substantially reduced
      our internal staffing due to the slower-than-anticipated level of
      AuraGen ® sales.
      We also suspended substantially all research and development activities. We
      continued to downscale our operations in fiscal 2005.




In
      September 2004, we entered into agreements with a group of investors and holders
      of secured debt in order to recapitalize the company. These agreements are
      referred to as the "2004 Recapitalization Transactions." Completion of the
      2004
      Recapitalization Transactions was intended to provide us with a more stable
      financial condition by infusing new capital of up to $15 million through the
      sale of units comprising Series B Preferred Stock and common stock warrants,
      conversion of $3.5 million of secured debt into Series B Preferred Stock and
      warrants and extension of the maturity of the remaining $2.1 million of secured
      debt to August 2005, and the settlement of legal claims with former management.
      Some of the investors who agreed to purchase Series B units failed to pay the
      subscription price when due in 2006, leaving more than $3 million of
      subscriptions unpaid as of May 31, 2005. This shortfall triggered defaults
      in
      other financial obligations. Accordingly, subsequent to the end of fiscal 2005,
      in June 2005 we filed for protection under Chapter 11 of the U.S. Bankruptcy
      Code. We continued our day-to-day operations as a “debtor-in-possession under
      the supervision of the Bankruptcy Court, and emerged on January 31, 2006 under
      a
      plan of reorganization.




Our
      financial statements included in this report have been prepared on the
      assumption that we will continue as a going concern, which contemplates the
      realization of assets and satisfaction of liabilities in the normal course
      of
      business. However, as a result of our losses from operations and default on
      certain of our obligations (see Note 2 and Note 7 to the Consolidated Financial
      Statements), there is substantial doubt about our ability to continue as a
      going
      concern. The consolidated financial statements do not include any adjustments
      to
      reflect the possible future effects on the recoverability and classification
      of
      assets or the amount and classification of liabilities that may result from
      our
      possible inability to continue as a going concern.




Our
      ability to continue as a going concern is dependent upon the successful
      achievement of profitable operations, the restructuring of our financial
      obligations, and the ability to generate sufficient cash from operations and
      obtain financing resources to meet our obligations. There is no assurance that
      such efforts will be successful.




17




Our
      current level of sales reflects our efforts to introduce a new product into
      the
      marketplace. Many purchases of the product are being made for evaluation
      purposes. We seek to achieve profitable operations by obtaining market
      acceptance of the AuraGen ® as a
      competitive - if not superior - product providing mobile power, thereby causing
      sales to increase dramatically to levels which support a profitable operation.
      There can be no assurance that this success will be achieved.





**Results
      of Operations**




**For
      the three and six month periods ended August 31, 2005**





We
      had
      income for the six months ended August 31, 2005 (the “Six Months FY2006”) of
      $13,182,560 compared to a net loss of $14,262,213 for the six months ended
      August 31, 2004 (the “Six Months FY2005”). Net operating revenues and gross
      profit were $804,710 and $507,600, respectively, in the Six Months FY2006 and
      $1,285,277 and $886,860, respectively, in Six Months FY2005.




Our
      net
      income for the three months ended August 31, 2005 (the “Second Quarter FY2006”)
      was $18,455,502 compared to a net loss of $11,690,737 for the three months
      ended
      August 31, 2004 (the “Second Quarter FY2005”). Net operating revenues and gross
      profit were $274,007 and $171,949 respectively, in the Second Quarter FY2006
      and
      $599,443 and $470,024 respectively, in Second Quarter FY2005.




Net
      revenues for the Six Months FY2006 of $804,710 represent a decrease of $480,567
      (37%) from $1,285,277 in the Six Months FY2005. Net revenues for the Second
      Quarter FY2006 of $274,007 represent a decrease of $325,436 (54%) from $599,443
      in the Second Quarter FY2005. This decline is primarily a result of slowing
      sales due to our deteriorating financial condition.




Cost
      of
      goods decreased to $297,110 for the Six Months FY2006 from $398,417 in the
      Six
      Months FY2005; a $101,307 (25%) decrease. Cost of goods decreased  to
      $102,058 in the Second Quarter FY2006 from $129,419 in the Second Quarter
      FY2005, a $27,361 (21%) decrease.




Engineering,
      research and development expenses decreased by $392,322 (33%) to $786,806 in
      the
      Six Months FY2006 from $1,179,128 in the Six Months FY2005 and by $363,361
      (57%)
      to $270,137 in the Second Quarter FY2006 from $633,498 in the Second Quarter
      FY2005. The Company also reduced its research and development activities
      throughout fiscal 2004 and 2005 and expects these efforts to continue at or
      below this reduced level at least through the Third Quarter of fiscal
      2006.





Selling,
      general and administrative (“SG&A”) expenses decreased  to
      $2,207,871 in the Six Months FY2006 from $2,920,629 in the Six Months FY2005;
      a
      decrease of $712,758 (24%) and decreased to $1,138,962 in the Second Quarter
      FY2006 from $1,557,898 in the Second Quarter FY2005; a decrease of $418,936
      (27%). This is primarily a result of continued reductions in our workforce
      due
      to our deteriorating financial condition.





For
      the
      six months FY2006, we recorded income of $16,154,430 as a change in liability
      for warrants that are exercisable, but for which there are not sufficient shares
      authorized. There was no comparable income in the prior year period.




Litigation
      settlement expense was $2,088,758 in the Second Quarter FY2005 and arose from
      the settlement of various litigation against the Company and certain of its
      officers by members of our former management and others, approximately
      $1,500,000 of this expense arose from valuations of the warrants, options and
      Series B units issued as part of the settlement. There was no comparable expense
      in the Six Months ended August 31, 2005.




18





Net
      interest expense for the Six Months FY2006 decreased $8,273,173 to $719,650
      from
      $8,992,823 in the Six Months FY2005 due principally to the recording of
      $7,450,925 of expense related to the beneficial conversion feature and warrants
      to be issued upon conversion of the Secured Notes and $674,158 of expense
      representing the value of warrants issued to those lenders (see Financial
      Position, Liquidity and Capital Resources).




**Critical
      Accounting Policies and Estimates**




Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of financial statements requires management to make
      estimates and disclosures on the date of the financial statements. On an
      on-going basis, we evaluate our estimates, including, but not limited to, those
      related to revenue recognition. We use authoritative pronouncements, historical
      experience and other assumptions as the basis for making judgments. Actual
      results could differ from those estimates. We believe that the following
      critical accounting policies affect its more significant judgments and estimates
      in the preparation of its consolidated financial statements.





Revenue
      Recognition




Aura
      is
      required to make judgments based on historical experience and future
      expectations, as to the reliability of shipments made to its customers. These
      judgments are required to assess the propriety of the recognition of revenue
      based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition,"
      and
      related guidance. Because sales are currently in limited volume and many sales
      are for evaluative purposes, we have not booked a general reserve for returns.
      We will consider an appropriate level of reserve for product returns when our
      sales increase to commercial levels.




Inventory
      Valuation and Classification




Inventories
      consist primarily of components and completed units for our AuraGen ® product.
      Inventories are valued at the lower of cost (first-in, first-out) or market.
      Provision is made for estimated amounts of current inventories that will
      ultimately become obsolete due to changes in the product itself or vehicle
      engine types that go out of production. Due to continuing lower than projected
      sales, we are holding inventories in excess of what we expect to sell in the
      next fiscal year. The net inventories which are not expected to be realized
      within a 12-month period based on current sales forecasts have been reclassified
      as long term. Management believes that existing inventories can, and will,
      be
      sold in the future without significant costs to upgrade it to current models
      and
      that the valuation of the inventories, classified both as current and long-term
      assets, accurately reflects the realizable values of these assets. The
      AuraGen ® product
      being sold currently is not technologically different from those in inventory.
      Existing finished goods inventories can be upgraded to the current model with
      only a small amount of materials and manpower. We make these assessments based
      on the following factors: i) existing orders, ii) age of the inventory, iii)
      historical experience and iv) our expectations as to future sales. If expected
      sales volumes do not materialize, there would be a material impact on our
      financial statements.





Valuation
      of Long-Lived Assets




Long-lived
      assets, consisting primarily of property and equipment, comprise a significant
      portion of our total assets. Long-lived assets are reviewed for impairment
      whenever events or changes in circumstances indicate that their carrying values
      may not be recoverable. Recoverability of assets is measured by a comparison
      of
      the carrying value of an asset to the future net cash flows expected to be
      generated by those assets. Net cash flows are estimated based on expectations
      as
      to the realizability of the asset. Factors that could trigger a review include
      significant changes in the manner of an asset’s use or our overall
      strategy.




19




Specific
      asset categories are treated as follows:




Accounts
      Receivable: We record an allowance for doubtful accounts based on management's
      expectation of collectibility of current and past due accounts
      receivable.




Property,
      Plant and Equipment: We depreciate our property and equipment over various
      useful lives ranging from five to ten years. Adjustments are made as warranted
      when market conditions and values indicate that the current value of an asset
      is
      less than its net book value.




When
      we
      determine that an asset is impaired, we measure any such impairment by
      discounting an asset’s realizable value to the present using a discount rate
      appropriate to the perceived risk in realizing such value. When we determine
      that an impaired asset has no foreseeable realizable value, we write such asset
      down to zero.




**Liquidity
      and Capital Resources**




We
      continued to experience acute liquidity challenges as of August 31, 2005. We
      had
      cash of approximately $213,000 and $61,000 at August 31 and February 28, 2005,
      respectively. For the six months ended August 31, 2005, we reported income
      of
      $13,182,560, and for the year ended February 28, 2005, we incurred a net loss
      of
      approximately $28.8 million, on net revenues of approximately $804,000 and
      $2.5
      million, respectively. We had working capital deficiencies at August 31 and
      February 28, 2005 of approximately $21 million and $34 million, respectively.
      These conditions, combined with our historical operating losses, raise
      substantial doubt as to our ability to continue as a going concern.




The
      cash
      flow generated from our operations to date has not been sufficient to fund
      our
      working capital needs, and we cannot predict when, or if, operating cash flow
      will be sufficient to fund our working capital needs. In the past, in order
      to
      maintain liquidity, we have relied upon external sources of financing,
      principally equity financing and private and bank indebtedness. We have no
      bank
      line of credit.





In
      September 2004, we entered into agreements with a group of investors and holders
      of secured debt in order to recapitalize the company (the "2004 Recapitalization
      Transactions"). Completion of the 2004 Recapitalization Transactions was
      intended to provide us with a more stable financial condition by infusing new
      capital of up to $15 million through the sale of units comprising Series B
      Preferred Stock and common stock warrants, conversion of $3.5 million of secured
      debt into Series B Preferred Stock and warrants and extension of the maturity
      of
      the remaining $2.1 million of secured debt to August 2005, and the settlement
      of
      legal claims with former management. Some of the investors who agreed to
      purchase Series B units failed to pay the subscription price when due in 2006,
      leaving more than $3 million of subscriptions unpaid as of May 31, 2005. This
      shortfall triggered defaults in other financial obligations. Accordingly, in
      June 2005 we filed for protection under Chapter 11 of the U.S. Bankruptcy Code
      and continued its day-to-day operations as a debtor in possession, under the
      supervision of the Bankruptcy Court.





At
      the
      time of our bankruptcy filing we were generating approximately $180,000 of
      monthly revenue and had approximately $500,000 of monthly operating expenses,
      with no cash reserves. Substantially all of our assets, including our operating
      revenues, were encumbered by liens in favor of a group of secured lenders.
      Therefore, our ability to continue to operate during the Chapter 11 proceeding
      was dependent upon our ability to use our operating revenue to pay expenses
      and
      to obtain “debtor-in-possession” financing.




20





Accordingly,
      through agreements reached by the Company with the secured lenders and a new
      lender, Blue Collar Films, Inc., and the approval of the Bankruptcy Court on
      July 27, 2005, we borrowed $1 million from Blue Collar Films, Inc., which loan
      was secured by substantially all of the assets of the Company. The loan bears
      interest at the rate of 17.5% and is repayable on June 30, 2006. Under the
      terms
      of the loan, the loan proceeds were reduced by a loan fee of $170,000. The
      lender was also granted the right to convert the loan into common stock during
      the loan term at a 20% discount to the then prevailing market
      price.





Additional
      financing was obtained from another entity, AGP Lender LLC (“AGP”) through
      agreements reached by the Company with AGP and approved by the Bankruptcy Court
      on September 7, 2005, to provide $1.2 million of financing. The loan is secured
      by substantially all of the assets of the Company and is junior to the other
      secured lenders, including Blue Collar Films, Inc. The loan bears interest
      at
      the rate of 17.5% and is repayable on June 30, 2006. Under the terms of the
      loan, the loan was subject to fees totaling16%. The lender was also granted
      the
      right to convert the loan into common stock during the loan term at a 20%
      discount to the then prevailing market price.





Our
      ability to continue as a going concern is dependent upon the successful
      achievement of profitable operations, the restructuring of our financial
      obligations and the ability to generate sufficient cash from operations and
      obtain financing resources to meet our obligations. There is no assurance that
      such efforts will be successful.





At
      August
      31, 2005, we had accounts receivable, net of allowance for doubtful accounts,
      of
      $255,658 compared to $637,436 at February 28, 2005.





There
      was
      no spending for property and equipment in the Six Months FY2005 or the Six
      Months FY2004. We have no material capital project that would require funding
      and we believe our current plant and equipment is sufficient to support our
      current level of sales.




Debt
      repayments of $62,274 were made in the Six Months FY2006 as compared to $93,995
      in the Six Months FY2005.




Capital
      Transactions




During
      the six months ended August 31, 2005, we issued 24,693 shares of Series B
      Convertible Preferred Stock for consideration of $123,463. We did not issue
      shares of Common Stock or Preferred Stock during the six months ended August
      31,
      2004.




During
      the six months ended August 31, 2004, we received an additional $1,730,000
      of
      interim funding from certain holders of the Secured Notes and issued
      approximately $125,000 of Secured Notes to satisfy our obligations to reimburse
      the holders’ costs associated with the Secured Notes (see Note 8 to the
      Condensed Consolidated Financial Statements) on substantially the same terms
      as
      the existing Secured Notes.




In
      April
      2004, we issued additional warrants (with a net exercise feature) to purchase
      an
      aggregate of 12,369,878 shares of common stock at a price per share of $0.024
      to
      the lenders under the Secured Notes (see Note 8) primarily as an inducement
      to
      the lender to continue to provide interim funding. These warrants were valued
      at
      $674,158 and have been recorded as interest expense in the accompanying
      financial statements.




In
      July
      2004, the Board of Directors granted warrants to purchase 10,000,000 shares
      of
      common stock for a period of seven years at a price per share of $0.020 to
      Neal
      Meehan, then Chairman, CEO and President of the Company, in recognition of
      his
      efforts to complete the 2004 Recapitalization Transactions.




21





During
      the six months ended August 31, 2004, we received $570,000 from investors as
      advances against the purchase of the Series B Preferred Stock contemplated
      in
      the 2004 Recapitalization Transactions. We have used and would be unable to
      return such funds in the event the offering does not close; in which case,
      such
      funds evidence short-term indebtedness of the Company. These advances are
      included in accrued expenses in the August 31, 2004 financial statements.




During
      the quarter ended August 31, 2004, we received $450,000 from the purchasers
      under the contemplated sale and lease back of our headquarters facilities as
      an
      advance against such purchase. These funds were used to cure the defaults on
      the
      mortgage note related to the real estate (see Note 7 and below). We have used
      and would be unable to return such funds in the event the offering does not
      close; in which case, such funds evidence short-term indebtedness of the
      Company.




Also
      during the quarter ended August 31, 2004, an employee of the Company advanced
      $150,000 for which the Company issued a $150,000 note payable. This note is
      to
      be repaid from the proceeds of accounts receivable collected after September
      1,
      2004 and specifies a flat $15,000 interest payment. It is also secured by the
      our accounts receivable. The holders of the Secured Notes have subordinated
      their security interest in our accounts receivable to allow us to grant this
      security interest.





**ITEM
      3. Quantitative and Qualitative Disclosures About Market Risk**





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





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




**ITEM
      4.    Controls and Procedures**




**Evaluation
      of Disclosure Controls and Procedures**





Disclosure
      controls and procedures are designed to provide reasonable assurance that
      information required to be disclosed by us in the reports that we file or
      submit, is recorded, processed, summarized and reported, within the time periods
      specified in the U.S. Securities and Exchange Commission’s rules and forms,
      and such information is accumulated and communicated to management as
      appropriate to allow timely decisions regarding required disclosures. Our Chief
      Executive Officer and Chief Financial Officer have evaluated our disclosure
      controls and procedures and have concluded, as of August 31, 2005, that they
      were not effective in view of our delinquent filings.





As
      of
      August 31, 2005, we were delinquent in filing all quarterly and annual SEC
      reports due since November 30, 2004. We did not have adequate financial
      resources to engage our outside auditors and ensure the timely filing of Form
      10-K for the fiscal year ended February 28, 2005, as disclosed in Form 12b-25
      filed with the SEC on May 26, 2005. In June 2005 our financial condition
      required us to seek protection from creditors under Chapter 11 of the U.S.
      Bankruptcy Code. The commencement of the bankruptcy proceeding placed additional
      demands on our then existing accounting personnel, including the filing of
      monthly financial reports with the bankruptcy court and the SEC. Our limited
      financial and personnel resources did not allow us to fully address our
      reporting obligations under the Securities Exchange Act of 1934 until we emerged
      from bankruptcy on January 31, 2006.




22





**Changes
      in Internal Control over Financial Reporting**





There
      have been no changes in our internal control over financial reporting during
      our
      fiscal quarter ended August 31, 2005, that have materially affected or are
      reasonably likely to materially affect our internal control over financial
      reporting.




**PART
      II - OTHER INFORMATION**




**ITEM
      1. Legal Proceedings**




*Chapter
      11 Reorganization of Aura Systems, Inc.*





On
      June
      24, 2005, we filed for reorganization under Chapter 11 of the U.S. Bankruptcy
      Code in the United States Bankruptcy Court, Central District of California,
      (Case Number LA 05-24550-SB). The filing of the bankruptcy proceeding acted
      as
      an automatic stay of all pending litigation as of the filing date without
      further approval of the Bankruptcy Court. The Company continued its day-to-day
      business operations as a “debtor-in-possession” under the jurisdiction of the
      Bankruptcy Court and in accordance with the applicable provisions of the
      Bankruptcy Code until it emerged from Chapter 11 under a Plan of Reorganization
      effective January 31, 2006.





For
      information regarding material developments in these proceedings for the quarter
      ended August 31, 2005, see “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations - Liquidity and Capital
      Resources.”





*Chapter
      11 Reorganization of Aura Realty, Inc.*





On
      August
      8, 2005, Aura Realty, Inc., a 50.1% owned subsidiary of the Company, filed
      its
      own Chapter 11 bankruptcy proceeding in the United States Bankruptcy Court,
      Central District of California, (Case Number LA 05-27856-SB). Aura Realty is
      the
      owner of the Company’s headquarters and manufacturing facility. The Company at
      the time of the filing was the lessee of the property. The filing was deemed
      necessary by the Company in order to protect the equity in the property in
      view
      of the inability of Aura Realty to cure outstanding arrearages to the senior
      lender, who had instituted foreclosure proceedings against the property. In
      October 2005 the Bankruptcy Court approved the sale of the real property to
      a
      third party for $8.75 million.





*Other
      Litigation*





At
      the
      beginning of the quarter ended August 31, 2005, the Company was engaged in
      numerous legal actions by creditors seeking payment of sums owed. Actions by
      the
      parties to these obligations to enforce their rights to collect the amounts
      due
      could require the Company to cease operations. The filing by the Company of
      the
      Chapter 11 bankruptcy proceeding in June 2005 acted as an automatic stay of
      all
      pending litigation as of the filing date without further approval of the
      Bankruptcy Court.




**ITEM
      2. Changes in Securities**




For
      a
      discussion of unregistered sales of securities during the quarter ended August
      31, 2005, see “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations - Liquidity and Capital Resources.”




23




All
      of
      the sales of unregistered securities were exempt from registration pursuant
      to
      Section 4(2) of the Securities Act of 1933 as these offerings were a private
      placement to a limited number of accredited investors without public
      solicitation or advertising.




**ITEM
      3. Defaults on Senior Securities**




Our
      filing of our voluntary petition for relief under the Bankruptcy Code discussed
      in Item 1 of Part II of this report was an event which triggered the
      acceleration of material direct financial obligations of the Company. These
      obligations included principally approximately $5.35 million of secured
      convertible notes. For additional information regarding this indebtedness,
      see
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations,” Note 8 to the Condensed Consolidated Financial Statements included
      elsewhere in this Report, and the Company’s Report on Form 8-K filed on June 30,
      2005.





**ITEM
      6. Exhibits and Reports on Form 8-K**




**a.**  **Exhibits:**





31.1
            Certifications
                pursuant to Rule 13a-14 under the Securities Exchange Act of
                1934.




31.2
            Certifications
                pursuant to Rule 13a-14 under the Securities Exchange Act of
                1934.




32.1
            Certification
                of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906
                of theSarbanes-Oxley
                Act of 2002.




**b.**  **Reports
      on Form 8-K:**




1.
            On
                June 30, 2005, we filed a Current Report on Form 8-K under (i) Item
                1.03
                to report the filing by the Company of a voluntary petition under
                Chapter
                11 of the U.S. Bankruptcy Code, and (ii) Item 2.04 to report the
                acceleration of certain direct financial obligations of the Company
                as a
                result of filing the bankruptcy
                proceeding.


2.
            On
                August 2, 2005, we filed a Current Report on Form 8-K under Item
                1.01 to
                report a borrowing by the Company pursuant to the approval of the
                Bankruptcy Court.





24




**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.**Date: March
                , 2008
            By:
            /s/ Melvin
                GagermanMelvin
                Gagerman
              Chief
                Financial Officer
              (Principal
                Financial and Accounting
              Officer
                and Duly Authorized Officer)




25