NOTE 6 – NOTES PAYABLE

Notes payable consisted of the following:

	August 31, 2012		February 29, 2012

Demand notes payable, at 10%	$	455,000	$	150,000
Convertible Promissory Note dated August 10, 2012, due August 10, 2017, convertible into shares of our common stock at a price of $0.76 per share. The notes carry an interest rate of 7% with interest only payments due on the 10th of each month with the principal payment due on the maturity date.		692,984		-
Senior secured convertible note dated September 23, 2011, due March 23, 2013, with 12 monthly payments commencing April 23, 2012 of $306,250 per month. The notes have a stated interest rate of 0%, with prepaid interest of $175,000. Balance net of Beneficial Conversion Feature		810,594		1,161,430
		1,958,578		1,311,430

Less: Current portion	$	1,265,594	$	1,214,644

Long-term portion	$	692,984	$	96,786

CONVERTIBLE DEBT

On September 23, 2011, Aura Systems, Inc. entered into purchase agreements to sell convertible notes with a total principal value of $3,675,000 and warrants to purchase shares of common stock. The notes have a 1.5 year maturity date and are convertible into shares of common stock at the initial conversion price of $0.75 per share. The warrants entitle the investors to acquire 4,900,000 and 490,000 shares and have an initial exercise price of $1 and $0.75 per share, respectively, and have a 5 year term. The proceeds of Convertible note were assigned between warrants and convertible note per ASC 470-20. The company recorded $175,000 as a discount (prepaid interest), $1,006,482 as capitalized financing cost and a discount of $1,790,482 on shares to be issued upon conversion of the note into equity. This discount (prepaid interest), capitalized finance cost and discount will be amortized over the life of the note.

CONVERTIBLE PROMISSORY NOTE

At August 31, 2012 and February 29, 2012, the other convertible promissory note payable amounted to $692,984 and Nil, respectively, net of discounts of $307,016 and Nil, respectively. The convertible note (the "Note") bears interest at 7% per annum, and is convertible into common stock of the Company at $0.76 per share (as well as variable conversion rates as described below). The note is due on August 10, 2017 and is unsecured.

7% Convertible Promissory Note:

On August 10, 2012 the Company entered into an agreement with the individual (the "holder") for the sale of $1,000,000 of unsecured Convertible Promissory Note (the "Note") to the holder. The Convertible Promissory Note balance together with all accrued interest thereon shall be due and payable on August 10, 2017 and the annual interest rate is 7% per annum and are due to be repaid 5 years from the closing date. The Note holder will receive interest on the unpaid principal amount payable monthly in arrears on the tenth day of each calendar month commencing September 10, 2012. Interest shall be computed on the actual number of days elapsed over a 360-day year. The Holder has the right from and after the Date of Issuance, and until any time until the Convertible promissory note is fully paid, to convert any outstanding and unpaid principal portion of the Convertible promissory note into shares of Common.

The Convertible Note has a variable conversion price. If, at any time while the Note remains outstanding, the Company issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof is less than the then Conversion Price of the Note (such lower price, the "Dilutive Price"), then the Conversion Price of this Note shall be adjusted to reflect such Dilutive Price. Such adjustment shall be made upon the issuance or sale of the Convertible Security bearing a dilutive price. In the event of default for the Note, the amount of principal and interest not paid when due becomes immediately due and payable.

The Company has valued the derivative liability for the convertible promissory note using the Black – Sholes model as of August 10, 2012 and August 31, 2012.

As of August 31, 2012 the fair value of the conversion features subject to derivative accounting was $322,627. The value of the conversion feature as of August 31, 2012 was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.59%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 71.33%; and (4) expected life of the conversion features of 5 year.