SC 13D/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 OMB APPROVAL OMB Number: 3235-0145 Expires: December 31, 2005 Estimated average burden hours per response 11

SCHEDULE 13D

Under the Securities Exchange Act of 1934
(Amendment No. 3)

Aura Systems, Inc.

(Name of Issuer)

Common Stock

(Title of Class of Securities)

051526101

(CUSIP Number)

Ellyn Roberts, Esq.
Shartsis, Friese & Ginsburg LLP

One Maritime Plaza, 18^th Floor

San Francisco, California 94111
(415) 421-6500

(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)

December 23, 2004

(Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of sections 240.13d-1(e), 240.13d-1(f) or 140.13d-1(g), check the following box. [ ]

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See section 240.13d-7 for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter the disclosures provided in a prior cover page.

The information required in the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

ICM Asset Management, Inc.

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) X
(b) ______

3. SEC Use Only

4. Source of Funds (See Instructions) (with respect to shares reported on lines 7 and 9) WC

(with respect to shares reported on lines 8 and 10) AF

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization Washington

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 630,808
	8. Shared Voting Power 628,238,800
	9. Sole Dispositive Power 630,808
	10. Shared Dispositive Power 628,238,800

11. Aggregate Amount Beneficially Owned by Each Reporting Person 628,869,608

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 60.2%

14. Type of Reporting Person (See Instructions)

IA, CO

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

James M. Simmons

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) X
(b) ______

3. SEC Use Only

4. Source of Funds (See Instructions) (with respect to shares reported on lines 7 and 9) PF

(with respect to shares reported on lines 8 and 10) AF

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization U.S.A.

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 6,145,826
	8. Shared Voting Power 628,869,608
	9. Sole Dispositive Power 6,145,826
	10. Shared Dispositive Power 628,869,608

11. Aggregate Amount Beneficially Owned by Each Reporting Person 635,015,434

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 60.5%

14. Type of Reporting Person (See Instructions)

IN, HC

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Koyah Ventures, LLC

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) X
(b) ______

3. SEC Use Only

4. Source of Funds (See Instructions) AF

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization Delaware

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 38,812,961
	8. Shared Voting Power 583,863,900
	9. Sole Dispositive Power 38,812,961
	10. Shared Dispositive Power 583,863,900

11. Aggregate Amount Beneficially Owned by Each Reporting Person 622,676,861

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 59.7%

14. Type of Reporting Person (See Instructions)

OO

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Koyah Leverage Partners, L.P.

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) ______
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) WC

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization Delaware

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 0
	8. Shared Voting Power 424,691,019
	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 424,691,019

11. Aggregate Amount Beneficially Owned by Each Reporting Person 424,691,019

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 49.9%

14. Type of Reporting Person (See Instructions)

PN

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Koyah Partners, L.P.

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) ______
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) WC

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization Delaware

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 0
	8. Shared Voting Power 106,602,931
	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 106,602,931

11. Aggregate Amount Beneficially Owned by Each Reporting Person 106,602,931

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 19.7%

14. Type of Reporting Person (See Instructions)

PN

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Koyah Microcap Partners Master Fund, L.P.

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) ______
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) WC

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization Cayman Islands

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 0
	8. Shared Voting Power 40,312,500
	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 40,312,500

11. Aggregate Amount Beneficially Owned by Each Reporting Person 40,312,500

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 8.4%

14. Type of Reporting Person (See Instructions)

PN

1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only).

Koyah Microcap Partners, Ltd.

2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) ______
(b) X

3. SEC Use Only

4. Source of Funds (See Instructions) WC

5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) ____

6. Citizenship or Place of Organization Cayman Islands

Number of Shares Beneficially Owned by Each Reporting Person With	7. Sole Voting Power 0
	8. Shared Voting Power 40,312,500
	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 40,312,500

11. Aggregate Amount Beneficially Owned by Each Reporting Person 40,312,500

12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) ______

13. Percent of Class Represented by Amount in Row (11) 8.4%

14. Type of Reporting Person (See Instructions)

CO

Item 1. Security and Issuer

This statement relates to shares of Common Stock (the "Stock") of Aura Systems, Inc. (the "Issuer"). The principal executive office of the Issuer is located at 2335 Alaska Avenue, El Segundo, California 90245.

Item 2. Identity and Background

The persons filing this statement and the persons enumerated in Instruction C of Schedule 13D and, where applicable, their respective places of organization, general partners, directors, executive officers and controlling persons, and the information regarding them, are as follows:

(a) ICM Asset Management ("ICM")
James M. Simmons
Koyah Ventures, LLC ("Koyah Ventures")
Koyah Leverage Partners, L.P. ("Koyah Leverage")
Koyah Partners, L.P. ("Koyah Partners')
Koyah Microcap Partners Master Fund, L.P. ("Koyah Microcap Master")
Koyah Microcap Partners, Ltd. ("Koyah Microcap")
(collectively, the "Filers").

(b) The business address of the Filers, except Koyah Microcap Master and Koyah Microcap is
601 W. Main Avenue, Suite 600, Spokane, WA 99201

The business address of Koyah Microcap Master and Koyah Microcap is:
c/o Citco Fund Services (Cayman Islands) Limited,
Safehaven Corporate Centre, West Bay Road, P.O. Box 31106 SMB
Grand Cayman, Cayman Islands

(c) Present principal occupation or employment or the Filers and the name, principal business and address of any corporation or other organization in which such employment is conducted:

ICM is an investment adviser registered with the Securities and Exchange Commission and is the investment adviser to investment limited partnerships, including Koyah Leverage, Koyah Partners, Koyah Microcap Master and individual client accounts. Mr. Simmons is the president and controlling shareholder of ICM and the manager and controlling owner of Koyah Ventures. Koyah Ventures is the general partner of investment limited partnerships to which ICM is investment adviser, including Koyah Leverage, Koyah Partners and Koyah Microcap Master. Koyah Microcap invests in securities indirectly by investing all of its assets in Koyah Microcap Master, and as such, it is the sole limited partner of Koyah Microcap Master. The securities held by Koyah Microcap Master are held for the benefit of the investors in Koyah Microcap

(d) During the last five years, none of the Filers has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

(e) During the last five years, none of the Filers was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

(f) Mr. Simmons is a United States citizen.

Item 3. Source and Amount of Funds or Other Consideration

The source and amount of funds used in purchasing the Stock were as follows:

Purchaser	Source of Funds	Amount
ICM	Funds under Management(1)	$13,784,870.20
ICM	Working Capital	$159,093.10
Mr. Simmons	Personal Funds	$706,715.55
Koyah Ventures, LLC	Working Capital	$414,004.92

⁽¹⁾ Includes funds used to purchase shares held by investment limited partnerships of which Koyah Ventures is the general partner, including Koyah Leverage's funds in the amount of $8,212,281.69, Koyah Partners' funds in the amount of $2,071,580.58 and Koyah Microcap Master's funds in the amount of $430,000.00. Koyah Microcap invests in securities indirectly by investing all of its assets in Koyah Microcap Master, and as such, it is the sole limited partner of Koyah Microcap Master. The securities held by Koyah Microcap Master are held for the benefit of the investors in Koyah Microcap.

Item 4. Purpose of Transaction

The Filers acquired the Stock for investment purposes, and such purchases were made in the Filers' ordinary course of business. In pursuing such investment purposes, the Filers may further purchase, hold, vote, trade, dispose or otherwise deal in the Stock at times, and in such manner, as they deem advisable to benefit from changes in market price of the Stock, changes in the Issuer's operations, business strategy or prospects, or from sale or merger of the Issuer. The Filers reserve the right to formulate other plans and/or make other proposals, and take such actions with respect to their investment in the Issuer, including any or all of the actions set forth in paragraphs (a) through (j) of Item 4 of Schedule 13D, and to acquire additional Stock or dispose of all the Stock beneficially owned by them, in public market or privately negotiated transactions. The Filers may at any time reconsider and change their plans or proposals relating to the foregoing.

The Filers hold, among other securities of the Issuer, shares of the Issuer's Series B Preferred Stock (the "Series B Preferred Shares"). The Issuer's Certificate of Incorporation entitles the holders of the Series B Shares to elect four of the Issuer's directors for as long as the Series B Shares are outstanding. Under that certain Shareholder Agreement effective as of September 14, 2004, among the holders of the Series B Shares (the "Series B Shareholders"), the Series B Shareholders agreed, among other things, to use their best efforts to cause the size of the Issuer's board of directors to remain set at seven directors at all times and that Koyah Leverage has the right to elect one of the four directors that the Series B Shareholders are entitled to elect. Neal F. Meehan is Koyah Leverage's designated director. The Shareholder Agreement is an exhibit to this Schedule 13D. See Item 7.

Item 5. Interest in Securities of the Issuer

(a), (b), (d) The beneficial ownership of the Stock of each Filer as of the date hereof is reflected on that Filer's cover page. ICM is an investment adviser with the power to invest in, vote and dispose of the Stock on behalf of its clients. Its clients have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the Stock. No client, other than Koyah Leverage, Koyah Partners, Koyah Microcap Master and Koyah Microcap separately holds more than 5% of the outstanding Stock. Mr. Simmons is the president and controlling shareholder of ICM and the sole manager and controlling owner of Koyah Ventures. As such, ICM and Mr. Simmons share beneficial ownership of all shares of Stock held in ICM client accounts.

(c) ICM, on behalf of client accounts, including Koyah Leverage, Koyah Partners, Koyah Microcap Master and Koyah Microcap, effected the following transactions in the Stock on the dates indicated, and such transactions are the only transactions in the Stock by the Filers since the date that this Schedule 13D was last amended. The transactions on December 16 and 23, 2004, were private transactions. The remaining transactions were in the open market.

Name	Purchase or Sale	Date	Koyah Leverage Account	Koyah Partners Account	Koyah Microcap Master Account3	Other Client Accounts	Personal/ Proprietary Account	Price per Share
ICM	Sale1	10/25/04				196,675		$0.05
ICM	Sale1	11/22/04				92,283		$0.036
ICM	Sale1	11/30/04				400		$0.036
ICM	Sale1	12/13/04				1,400		$0.075
ICM	Sale1	12/14/04				7,800		$0.035
ICM	Sale1	12/15/04				40,367		$0.034
ICM	Purchase	12/16/04			20,625,000			N/A2
ICM	Purchase	12/23/04			19,687,500			N/A2

Notes:

1
These securities were sold by separate investment advisory accounts of ICM that terminated their investment advisory contracts and in connection therewith instructed ICM to make such sale or that otherwise directed ICM to sell the securities on a non-discretionary basis. ICM had no pecuniary interest in such securities or the proceeds from the sale thereof and disclaims any beneficial ownership interest in such securities or proceeds.

2
ICM purchased Convertible Promissory Notes (the "Notes") in the principal amount of $430,000 for the account of Koyah Microcap Master. The Notes have the same terms as the Convertible Promissory Notes held by the other Filers as reported on Amendment No. 2 to this Schedule 13D filed September 27, 2004. The Notes are convertible into units (the "Units") at a conversion price equal to $1,000 in principal amount per Unit. Each Unit consists of 200 shares of the Issuer's Series B Preferred Shares and a Series B Warrant (the "Warrants"). Each Warrant entitles the holder to purchase up to 12,500 shares of the Stock at an exercise price of $0.02 per share. In addition, the holders of the Notes are entitled to purchase additional Units equal to 50% of the Units acquired. The Stock to be issued on exercise of the Series B Preferred Shares and the Warrants held by the Filers are included in the number of shares of the Stock shown as being beneficially owned by each Filer on that Filer's cover page. The purchase pr ice of the Notes is included in the amount of funds used in purchasing the Stock reported in Item 3 of this Schedule 13D. Copies of the Notes, the Certificate of Designations for the Series B Preferred Shares and the Warrants are exhibits to this Schedule 13D. See Item 7.

3
Koyah Microcap invests in securities indirectly by investing all of its assets in Koyah Microcap Master, and as such, it is the sole limited partner of Koyah Microcap Master. The securities held by Koyah Microcap Master are held for the benefit of the investors in Koyah Microcap.

Item 6. Contracts, Arrangement, Understandings or Relationships with Respect to Securities of the Issuer

Koyah Ventures is the general partner of investment partnerships, including Koyah Leverage, Koyah Partners and Koyah Microcap Master, pursuant to agreements of limited partnership that grant to Koyah Ventures the authority, among other things, to invest the funds of Koyah Leverage, Koyah Partners and Koyah Microcap Master and such other partnerships in the Stock, to vote and dispose of the Stock and to file this statement on their behalf. Pursuant to such agreements, Koyah Ventures is entitled to allocations based on assets under management and realized and unrealized gains.

ICM and some of the investment funds for which it serves as investment adviser and Koyah Ventures serves as general partner, including Koyah Leverage and Koyah Partners, hold warrants to purchase the Stock. The securities for which such warrants are exercisable are included in the total shares of the Stock shown above as being beneficially owned by the Filers.

Koyah Leverage, Koyah Partners, Koyah Microcap Master and Koyah Microcap are filing this Schedule 13D jointly with the other Filers, but not as members of a group, and each of them expressly disclaims membership in a group. In addition, the filing of this Schedule 13D on behalf of Koyah Leverage, Koyah Partners, Koyah Microcap Master and Koyah Microcap should not be construed as an admission that any of them is, and each of them disclaims that it is, the beneficial owner as defined in Rule 13d-3 under the Securities Exchange Act of 1934, of any of the Stock covered by this Schedule 13D.

Item 7. Material to Be Filed as Exhibits

Exhibit A Agreement Regarding Joint Filing of Statement on Schedule 13D or 13G previously filed.

*Exhibit B Agreement dated 7/24/03

*Exhibit C Promissory Note (Term) - Koyah Partners, L.P. dated 7/24/03

*Exhibit D Promissory Note (Term) - Koyah Leverage Partners, L.P. dated 7/24/03

*Exhibit E Promissory Note (Multiple Advance) - Koyah Partners, L.P. dated 7/24/03

*Exhibit F Promissory Note (Multiple Advance) - Koyah Leverage Partners, L.P. dated 7/24/03

*Exhibit G Security Agreement dated 7/24/03

*Exhibit H Amendment and Waiver Agreement dated 8/6/03

*Exhibit I Additional Advance Agreement dated 8/18/03

*Exhibit J Stock Pledge Agreement dated 8/18/03

*Exhibit K Amendment Agreement dated 8/21/03

*Exhibit L Second Amendment Agreement dated 9/18/03

*Exhibit M Third Amendment Agreement dated 9/30/03

*Exhibit N Fourth Amendment Agreement dated 10/16/03

*Exhibit O Fifth Amendment Agreement dated 10/27/03

*Exhibit P Sixth Amendment Agreement dated 11/11/03

*Exhibit Q Seventh Amendment Agreement dated 11/25/03

*Exhibit R Eighth Amendment Agreement dated 12/19/03

*Exhibit S Ninth Amendment Agreement dated 01/08/04

*Exhibit T Security Agreement Amendment dated 01/15/04

*Exhibit U Warrant Amendment Agreement dated 01/08/04

*Exhibit V Warrant Koyah Leverage Partners, L.P. dated 01/08/04

*Exhibit W Warrant Koyah Partners, L.P. dated 01/08/04

*Exhibit X Warrant James Simmons dated 01/08/04

*Exhibit Y Warrant Raven Partners, L.P. dated 01/08/04

*Exhibit Z Tenth Amendment Agreement dated 03/10/04

*Exhibit AA Eleventh Amendment Agreement dated 03/11/04

*Exhibit BB Twelfth Amendment Agreement dated 03/18/04

**Exhibit CC Thirteenth Amendment Agreement dated 04/05/04

**Exhibit DD Warrant Koyah Leverage Partners, L.P. dated 04/05/04

**Exhibit EE Warrant Koyah Partners, L.P. dated 04/05/04

***Exhibit FF Fourteenth Amendment Agreement dated 04/30/04

***Exhibit GG Fifteenth Amendment Agreement dated 06/03/04

***Exhibit HH Agreement Koyah Ventures, LLC dated 06/14/04

***Exhibit II Convertible Promissory Note (Term) dated 06/14/04

***Exhibit JJ Security Agreement dated 06/14/04

***Exhibit KK Stock Pledge Agreement dated 06/14/04

***Exhibit LL Agreement Raven Partners, L.P. dated 06/14/04

***Exhibit MM Convertible Promissory Note (Term) dated 06/14/04

***Exhibit NN Security Agreement dated 06/14/04

***Exhibit OO Stock Pledge Agreement dated 06/14/04

***Exhibit PP Joinder Agreement dated 06/14/04

***Exhibit QQ Amendment Agreement Koyah Ventures, LLC dated 07/07/04

***Exhibit RR Amendment and Conversion Agreement effective 09/14/04

***Exhibit SS Certificate of Designations of Series B Cumulative Preferred Stock of Aura Systems, Inc.

***Exhibit TT Shareholders Agreement effective 09/14/04

***Exhibit UU Form of Warrant to Purchase Common Stock of Aura Systems, Inc. effective 09/14/04

***Exhibit VV Registration Rights Agreement effective 09/14/04

***Exhibit WW Form of Securities Purchase Agreement effective 09/14/04

Exhibit XX Convertible Promissory Note dated 12/16/04

Exhibit YY Stock Pledge Agreement dated 12/16/04

Exhibit ZZ Security Agreement dated 12/16/04

Exhibit AAA Registration Rights Agreement dated 12/16/04

Exhibit BBB Joinder Agreement dated 12/16/04

Exhibit CCC Agreement between Aura Systems, Inc. and Koyah Microcap Partners Master Fund, L.P. dated 12/16/04

Exhibit DDD Convertible Promissory Note dated 12/23/04

Exhibit EEE Registration Rights Agreement dated 12/23/04

Exhibit FFF Agreement between Aura Systems, Inc. and Koyah Microcap Partners Master Fund, L.P. dated 12/23/04

*Incorporated by reference to the initial Schedule 13D filed by the Filers with respect to the Stock on March 18, 2004.

**Incorporated by reference to Amendment No. 1 to the Schedule 13D filed with respect to the Stock on April 9, 2004.

***Incorporated by reference to Amendment No. 2 to the Schedule 13D filed with respect to the Stock on September 27, 2004.

SIGNATURES

After reasonable inquiry and to the best of my knowledge, I certify that the information set forth in this statement is true, complete and correct.

Dated: December 30, 2004

/s/ James M. Simmons	ICM Asset Management, Inc. By: /s/ Robert J. Law, Senior Vice President
Koyah Ventures, LLC By: /s/ Robert J. Law, Senior Vice President	Koyah Leverage Partners, L.P. By: Koyah Ventures, LLC, General Partner By: /s/ Robert J. Law, Senior Vice President
Koyah Partners, L.P. By: Koyah Ventures, LLC, General Partner By: /s/ Robert J. Law, Senior Vice President	Koyah Microcap Partners Master Fund, L.P. By: Koyah Ventures, LLC, General Partner By: /s/ Robert J. Law, Senior Vice President
Koyah Microcap Partners, Ltd. By: ICM Asset Management, Inc., Attorney-in-fact By: /s/ Robert J. Law, Senior Vice President

EXHIBIT A

AGREEMENT REGARDING JOINT FILING

OF STATEMENT ON SCHEDULE 13D OR 13G

The undersigned agree to file jointly with the Securities and Exchange Commission (the "SEC") any and all statements on Schedule 13D or Schedule 13G (and any amendments or supplements thereto) required under section 13(d) of the Securities Exchange Act of 1934, as amended, in connection with purchases by the undersigned of the securities of any issuer. For that purpose, the undersigned hereby constitute and appoint ICM Asset Management, Inc., a Washington corporation, as their true and lawful agent and attorney-in-fact, with full power and authority for and on behalf of the undersigned to prepare or cause to be prepared, sign, file with the SEC and furnish to any other person all certificates, instruments, agreements and documents necessary to comply with section 13(d) and section 16(a) of the Securities Exchange Act of 1934, as amended, in connection with said purchases, and to do and perform every act necessary and proper to be done incident to the exercise of the foregoing power, as fully as the unders igned might or could do if personally present.

Dated: December 30, 2004

/s/ James M. Simmons	ICM Asset Management, Inc. By: /s/ Robert J. Law, Senior Vice President
Koyah Ventures, LLC By: /s/ Robert J. Law, Senior Vice President	Koyah Leverage Partners, L.P. By: Koyah Ventures, LLC, General Partner By: /s/ Robert J. Law, Senior Vice President
Koyah Partners, L.P. By: Koyah Ventures, LLC, General Partner By: /s/ Robert J. Law, Senior Vice President	Koyah Microcap Partners Master Fund, L.P. By: Koyah Ventures, LLC, General Partner By: /s/ Robert J. Law, Senior Vice President
Koyah Microcap Partners, Ltd. By: ICM Asset Management, Inc., Attorney-in-fact By: /s/ Robert J. Law, Senior Vice President

EX-1

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION, (B) THE TRANSFER IS MADE IN ACCORANCE WITH RULE 144 UNDER SUCH ACT, (C) THE BORROWER RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THE NOTE (CONCURRED IN BY LEGAL COUNSEL FOR THE BORROWER) STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (D) THE BORROWER OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.

CONVERTIBLE PROMISSORY NOTE

Principal Amount: $220,000 Spokane, Washington
Interest Rate: 10% December 16, 2004

FOR VALUE RECEIVED, the undersigned, AURA SYSTEMS, INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order of KOYAH MICROCAP PARTNERS MASTER FUND, L.P., a Cayman Islands limited partnership ("Lender"), at such places and times and under the terms and conditions set forth below, the lesser of (i) the maximum principal amount of this Convertible Promissory Note (this "Note") set forth above and (ii) the aggregate principal amount advanced by Lender at its option from time to time under this Note, together with interest thereon and any other amounts set forth herein.

1. Principal Payments. The entire principal balance of this Note shall be due and payable as follows (the "Maturity Date"): after August 19, 2005, such principal balance shall be due and payable upon five (5) days demand; provided however, that if all of the conditions set forth in Section 10 of this Note, other than the condition set forth in clause (iii)(A) thereof have been satisfied as of August 19, 2005, then the Maturity Date (if all other Section 10 conditions remain satisfied at the commencement of each extension) shall be further amended and extended for up to four (4) successive three (3) month periods (ending respectively on November 19, 2005, February 19, 2006, May 19, 2006 and August 19, 2006) to allow such condition set forth in Section 10(iii)(A) to be satisfied. If the condition set forth in Section 10 (iii)(A) is not satisfied by August 19, 2006, such principal balance shall be due and payable upon five (5) days demand.
2. Interest Rate and Payment. The outstanding principal balance of this Note shall accrue interest at the rate of ten percent (10%) per annum. Accrued interest under this Note shall be due and payable on the Maturity Date.
3. Prepayment. This Note may be prepaid in whole but not in part, at any time upon ten (10) business days' prior written notice, without any premium or penalty. In the event of any tender of prepayment of this Note by Borrower, Lender shall have the right to exercise its conversion rights instead of electing acceptance of such prepayment, as provided in Section 9 of this Note.
4. Collection Costs Borne by Borrower. Borrower agrees to pay all costs and expenses, including without limitation reasonable attorneys' fees, incurred by Lender in enforcing the terms of this Note or in collecting this Note, including without limitation in any out-of-court workout, any court action, any appeal or any bankruptcy proceeding.
5. Late Charge. If any payment of principal or interest under this Note shall not be made within five (5) days after the due date, this Note shall bear interest (after as well as before judgment) at a rate of five percent (5%) per annum above the rate of interest which would otherwise have been payable under this Note or the maximum rate of interest permitted to be charged by applicable law, whichever is less.
6. Governing Law. Consistent with the governing law and venue provisions of the Intercreditor Agreement (as defined below), this Note shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties hereto, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non-conveniens. Notwithstanding the foregoing, any party obtaining any order or judgment in any of the above referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.
7. Intended Beneficiaries. Nothing in this Note, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Note, except as may be otherwise expressly provided in this Note.
8. Severability. If any part of this Note is determined to be illegal or unenforceable, all other parts shall remain in full force and effect.
9. Conversion of Note. At the option of Lender, the outstanding principal balance of this Note and all accrued interest, fees or other amounts payable under this Note, at any time prior to acceptance by Lender of payment thereof instead of conversion as provided below, may be converted, in whole or in part, into units (the "Units") consisting of shares of Series B Cumulative Convertible Preferred Stock (the "Series B Stock") and warrants to purchase Common Stock (the "Warrants") of Borrower, at the same price and on the same other terms and conditions as the $5,000,000 minimum/$15,000,000 maximum Series B Cumulative Convertible Preferred Stock financing (the "Series B Financing"), as set forth in the Securities Purchase Agreement (the "Securities Purchase Agreement") with the initial investors in the Series B Financing which is attached as Exhibit A to the Amendment and Conversion Agreement dated as of August 19, 2004 (the "Amendment and Conversion Agreement") among Borr ower and the Lenders named therein (collectively, the "Prior Intercreditor Lenders"), the terms and conditions of which are incorporated herein by reference; provided, however, that the following terms shall be adjusted as applied to Lender (as similarly adjusted for the Prior Intercreditor Lenders): (i) the subscription amount shall be the amount being converted by Lender in the particular conversion involved and the subscription date shall be the date of such conversion; (ii) the option to purchase additional Units contained in Section 1.5 of the Securities Purchase Agreement (A) shall be in an amount up to fifty percent (50%) of the total number of Units issuable to Lender upon full conversion of this Note and (B) shall be exercisable by Lender, in whole or in part, at any time on or before May 31, 2005, (1) in increments as set forth in Schedule 1 attached hereto and (2) subject to earlier termination upon notice as set forth in Section 1.5(a)(iii) of the Securities Purchase Agreement, but with th e amount of the option exercisable under the circumstances described in Section 1.5(a)(iii) being equal to fifty percent (50%) of the unexercised portion of the original option; (iii) Section 4.5 of the Securities Purchase Agreement shall not apply to Lender and instead shall be replaced by Section 13 of the Agreement dated as of the date hereof between Borrower and Lender (the "Agreement"); (iv) Section 8.1 of the Securities Purchase Agreement shall not apply to Lender and instead shall be replaced by Section 11 of the Agreement; and (v) the Registration Rights Agreement referred to in the Securities Purchase Agreement shall not apply to the Lender and shall be replaced by the Registration Rights Agreement referred to in the Amendment and Conversion Agreement. Upon any conversion, Borrower and Lender shall be deemed to have entered into a Securities Purchase Agreement (with such adjusted terms) for such conversion, as if executed and delivered by them.

Upon any tender of payment of this Note by Borrower (whether by prepayment before maturity or payment at or after maturity), Lender shall have ten (10) business days thereafter to elect either acceptance of such payment instead of conversion or exercise of its conversion right, in whole or in part. In the event Lender fails to make such election by such date, Lender shall be deemed to have elected acceptance of payment instead of conversion, provided that the payment tendered is the full amount owing under this Note. Any exercise of such conversion right shall be at the option of Lender, in its sole discretion. Lender may exercise such conversion right by providing to Borrower written notice of exercise in the form attached as Exhibit B to the Amendment and Conversion Agreement or other appropriate form. In the event of any stock splits, stock dividends, recapitalizations or similar events after December 15, 2004 but prior to the date of conversion, then the number and kind of s ecurities issuable upon conversion shall be appropriately adjusted. Such conversion shall be effective immediately upon giving such notice and as of such date Lender shall be treated for all purposes as the holder of the securities issuable upon conversion.

As soon as practicable after such conversion, Borrower, at its expense, shall cause to be issued in the name of and delivered to Lender the securities to which Lender shall be entitled upon such conversion. Upon a partial conversion of this Note, (i) this Note may be surrendered by Lender and replaced with a new Note of like tenor for the remaining balance of the Note surrendered or (ii) Lender may retain this Note and the parties may keep separate records of the outstanding balance of this Note. A new Note shall be delivered to Lender as soon as practicable after any such surrender. No fractional shares shall be issued upon such conversion. If upon such conversion a fractional share results, the number of shares to be issued upon conversion shall be rounded upwards or downwards to the nearest whole number.

10. Mandatory Conversion of Note. At the end of each calendar quarter after the Company has received a total of $4,100,000.00 in New Funds, plus an additional amount equal to Costs and Fees (as those terms are defined below), but subject to the conditions set forth below, Lender shall exercise its conversion rights under Section 9 for an aggregate conversion amount (a "Mandatory Conversion") in the same percentage of outstanding loans as the Additional Conversions of the Prior Intercreditor Lenders occurring under Section 9(b) of the Amendment and Conversion Agreement. Lender shall exercise such conversion right by giving written notice thereof. For purposes of this paragraph the term "New Funds" means cash received by the Company after the initial closing of the Series B financing from payments due under notes made by investors under the Securities Purchase Agreement or from cash received from new investors; it being understood that funds received from Lender do not constit ute New Funds. New Funds shall not include, among other things (1) funds received at or prior to the time of initial closing of the Series B financing, (2) debt converted at the time of initial closing of the Series B financing, (3) conversions of dividend accruals or stock issued in exchange for non-cash consideration or (4) funds paid to or on account of the Company in connection with the sale of the real property located at 2335 Alaska Avenue and 2330 Utah Avenue, El Segundo, California (the "Real Estate"). For purposes of this paragraph the term "Costs and Fees" means any legal costs and legal fees incurred by others and paid or payable by the Company in connection with the (m) sale of the Real Estate including, without limitation, assumption by the purchasers thereof of the debt on the Real Estate, (n) settlement with the minority Shareholders of Aura Realty, Inc., and (o) settlement of litigation filed by, and other claims of, certain former officers and employees pursuant to a Mutual Settlement Agreem ent and Release between the Company and Arthur Schwartz, et. al., dated as of August ___, 2004.

The obligations of Lender to do any Mandatory Conversion shall be subject to the following conditions: (i) all investors in the Series B Financing have fulfilled all of their respective obligations under the Securities Purchase Agreement(s) for the Series B Financing and any related promissory notes or other agreements or documents and the Company has received all of the funds as scheduled under such Securities Purchase Agreement(s) and any related promissory notes or other agreements or documents; (ii) the authorized number of shares of Common Stock of the Company has been increased sufficiently; (iii) (A) the registration statement described in Section 1.3 of the Registration Rights Agreement (as defined below) is effective or (B) an automatic conversion has occurred under Section 6(a)(ii) of the Certificate of Designations for the Series B Financing; and (iv) the Company has resolved matters with its creditors in a manner satisfactory to the Prior Intercreditor Lenders hold ing a majority of the then outstanding total balance of the Convertible Promissory Notes held by the Prior Intercreditor Lenders.

In the event that Lender has previously exercised its conversion right other than as part of the Mandatory Conversions, the amount of such other conversion shall be credited against Lender's amount of subsequent Mandatory Conversions. In the event that (x) additional issuances and fundings of the Series B Financing occur during any calendar quarter but the conditions to the obligations of Lender to do any Mandatory Conversion are not satisfied at the end of such calendar quarter and (y) such conditions are subsequently satisfied, the obligations of Lender to do such Mandatory Conversion shall become effective on the date that such conditions are subsequently satisfied.

11. Registration Rights Agreement and Shareholder Agreement. In connection with this Note, Lender is entering into a Registration Rights Agreement with the Company in the form attached as Exhibit F to the Amendment and Conversion Agreement (the "Registration Rights Agreement"). Upon any conversion of this Note, Lender shall enter into a Shareholder Agreement with other Series B shareholders in the form attached as Exhibit D to the Securities Purchase Agreement (the "Shareholder Agreement").

12. Representations of Lender. By acceptance of this Note, Lender represents to Borrower that Lender is an "accredited investor" as such term is defined in Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), and that this Note and any securities issuable upon any conversion thereof are being acquired for Lender's own account and for the purpose of investment and not with a view to, or for sale in connection with, the distribution of the same, nor with any present intention of distributing or selling the same.

13. No Shareholder Rights. This Note shall not entitle Lender to any voting rights or any other rights as a shareholder of Borrower until any conversion of this Note.

14. Security. This Note shall be secured by a junior security interest in tangible and intangible personal property of Borrower pursuant to a Security Agreement being executed by Borrower (the "Security Agreement") and a Stock Pledge Agreement being executed by the Borrower.

15. Defaults. Each of the following shall constitute a default under this Note (a "Default"):

1. Failure by Borrower to make any payment due under this Note or under any other agreement with Lender or the Prior Intercreditor Lenders; any representation or warranty by Borrower under this Note or any other agreement with Lender or the Prior Intercreditor Lenders shall be false or inaccurate in any material respect when made; or failure by Borrower to comply with the provisions of any other covenant, obligation or term of this Note or any other agreement with Lender or the Prior Intercreditor Lenders;
2. Failure by Borrower to pay when due any other indebtedness or obligations in excess of fifty thousand dollars ($50,000) which shall continue after the applicable grace period, if any, specified in the agreement relating to such indebtedness or obligation; failure by Borrower to comply with the provisions of any other covenant, obligation or term of any agreement relating to such indebtedness or obligation which shall continue after the applicable grace period, if any, specified in such agreement if the effect of such failure is to accelerate, or permit the acceleration of, the due date of such indebtedness or obligation; or any such indebtedness or obligation shall be declared to be due and payable, or required to be prepaid, prior to the stated maturity date thereof; provided, however, that the existing defaults listed in the Schedule of Exceptions attached hereto as Schedule 2 shall not constitute a Default so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved and the Company otherwise remains in compliance with all other provisions of this Note and all other agreements with Lender and the Prior Intercreditor Lenders;
3. Borrower makes a general assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, petitions to any court for a receiver or trustee for Borrower or any substantial part of its property, commences any proceeding relating to the arrangement, readjustment, reorganization or liquidation under any bankruptcy or similar laws; there is commenced against Borrower any such proceedings which remain undismissed for a period of sixty (60) days; or Borrower by any act indicates its consent or acquiescence in any such proceeding or the appointment of any such trustee or receiver;

(d) Lender shall fail to have a valid perfected security interest in any of the collateral covered by the Security Agreement, a valid security interest in the any of the collateral covered by the Stock Pledge Agreement or a perfected security interest in any of the collateral covered by the Stock Pledge Agreement after delivery thereof to Lender or its agent or designee; or

(e) The investors in the Series B Financing shall fail to fulfill or default on any of their respective obligations under the Securities Purchase Agreement(s) for the Series B Financing or any related promissory notes or other agreements or documents or Borrower shall fail to receive all of the funds as scheduled under such Securities Purchase Agreement(s) or any related promissory notes or other agreements or documents, in each case if (i) the subscription amount(s) of the defaulting or non-paying investor(s) is at least twenty percent (20%) of the total subscription amounts of all investors in the Series B Financing and (ii) the default or failure to receive funds continues for sixty (60) days from the scheduled due date.

16. Acceleration; No Exclusive Remedy. Upon any Default set forth in Section 15(c) above, all principal, interest and other amounts owing hereunder automatically shall become immediately due and payable. Upon any other Default, Lender may declare, by written notice to Borrower, that all principal, accrued interest and other amounts owing hereunder shall be immediately due and payable to Lender. Notwithstanding anything to the contrary herein, Lender shall be entitled to any and all remedies available to it in the event of a Default hereunder and Lender's pursuance of any particular remedy shall not preclude Lender from seeking any other remedies available to it at law or in equity.

17. Notices. Any notice under this Note shall be given in writing and shall be addressed to the party to be notified at the address indicated below, or at such other address as such party may designate by written notice to the other party.

Aura Systems, Inc.
2335 Alaska Avenue
El Segundo, CA 90245
Attn: Neal Meehan
Fax: 310-643-8719

Koyah Microcap Partners Master Fund, L.P.

c/o ICM Asset Management, Inc.

601 W. Main Avenue, Suite 600

Spokane, WA 99201

Attn: Robert Law

Fax: 509-444-4500

18. Intercreditor Agreement. The terms and conditions of this Note shall also be governed by and subject to the terms and conditions of an Intercreditor Agreement dated as of January 19, 2004, as supplemented by a Joinder Agreement dated as of June 14, 2004, among Borrower, Koyah Leverage Partners, L.P., Koyah Partners, L.P., Raven Partners, L.P., and Koyah Ventures LLC, to which Lender is being added as an additional party pursuant to a Joinder Agreement dated as of the date hereof (collectively, the "Intercreditor Agreement").

19. Miscellaneous.

(a) No delay or omission on the part of Lender in exercising any right under this Note shall operate as a waiver of such right or of any other right under this Note.

(b) Borrower hereby waives presentation for payment, demand, notice of demand and of dishonor and non-payment of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party. The pleading of any statute of limitations as a defense to any demand against the Borrower, any endorsers, guarantors and sureties of this Note is expressly waived by each and all of such parties to the extent permitted by law. Time is of the essence under this Note.

(c) Any payment hereunder shall first be applied to any enforcement or collections costs, then against accrued interest or late charges hereunder and then against the outstanding principal balance hereof.

(d) All payments under this Note shall be made without set-off, deduction or counterclaim.

(e) Borrower and Lender intend to comply at all times with applicable usury laws. If at any time such laws would render usurious any amounts due under this Note under applicable law, then it is Borrower's and Lender's express intention that Borrower not be required to pay interest on this Note at a rate in excess of the maximum lawful rate, that the provisions of this section shall control over all other provisions of this Note which may be in apparent conflict hereunder, that such excess amount shall be immediately credited to the principal balance of this Note, and the provisions hereof shall immediately be reformed and the amounts thereafter decreased, so as to comply with the then applicable usury law, but so as to permit the recovery of the fullest amount otherwise due under this Note.

(f) This Note may be transferred or assigned by Lender in whole or in part if, on Borrower's reasonable request, Lender provides an opinion of counsel reasonably satisfactory to Borrower that such transfer does not require registration under the Securities Act of 1933, as amended, and applicable state securities law, except that this Note may be transferred by a Lender which is a partnership or limited liability company to a partner, former partner, member, former member or other affiliate of such partner or limited liability company, as the case may be, if (i) the transferee agrees in writing to be subject to the terms of this Note and (ii) Lender delivers notice of such transfer to Borrower. Any rights and obligations of Borrower and Lender under this Note shall be binding upon and inure to the benefit of their respective permitted successors, assigns, heirs, administrators and transferees.

(g) If at any time the number of authorized but unissued shares of Borrower shall not be sufficient to effect the conversion of this Note, Borrower will take all such corporate action as may be necessary to increase its authorized but unissued shares to such number of shares as shall be sufficient for such purpose. The parties acknowledge that Borrower currently does not have any authorized but unissued shares of its common stock available for issuance and Borrower hereby agrees to use its best efforts to take action to call a shareholder meeting and increase its authorized but unissued common stock as soon as practicable.

(h) Any term of this Note may be amended and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of Borrower and Lender in the case of an amendment and only with the written consent of the waiving party in the case of a waiver.

(i) All shares issued upon conversion of this Note shall be validly issued, fully paid and non-assessable, and Borrower shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof. Borrower shall not be required to pay any transfer tax or other similar charge imposed in connection with any transfer involved in the issuance of any certificate for shares in any name other than that of Lender.

(j) Borrower will not, by amendment of its Certificate of Incorporation or Bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of Lender under this Note against impairment. Without limiting the generality of the foregoing, Borrower (i) will not increase the par value of any shares issuable upon conversion of this Note above the amount payable therefore upon such exercise, and (ii) will take all such action as may be necessary or appropriate in order that Borrower may validly and legally issue fully paid and non-assessable shares upon conversion of this Note.

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ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in its corporate name by its duly authorized officer and dated the day and year first above written.

AURA SYSTEMS, INC.

By:

Name:

Title:

I:\Spodocs\28601\00024\agree\00281016.DOC:lg

SCHEDULE 1

Option Exercisability

1. Exercisable Increments.

The option of Lender under Section 1.5 of the Securities Purchase Agreement (as adjusted pursuant to Section 9 of the Note) shall be exercisable at any time in an amount equal to the total amount of any conversions of Lender actually done up to that time.

2. Termination.

The option of Lender under such Section (as so adjusted) shall terminate in increments (expressed as a percentage of the original total amount of such option) as follows:

	Terminated Increment
December 31, 2004	50%
May 31, 2005	50%
TOTAL	100%

Notwithstanding the foregoing, if any portion of the option of Lender is not exercisable on December 31, 2004 because the conditions to the obligation of Lender to do a Mandatory Conversion underlying such portion of the option have not been satisfied by such date, then such portion of the option shall not terminate on December 31, 2004 and shall instead be extended to May 31, 2005.

SCHEDULE 2

Schedule of Exceptions

1. Shareholder litigation (Barovich/Chiau et al) judgment settlement for approximately $789,000 is in default. In April 2003, this creditor served Writs of Execution against the Company's bank accounts but has taken no further action.

2. Convertible notes payable, issued in August October 2002 for a total principal amount of $625,000 are in default.

3. The $1,000,000 Note Payable to purchasers in a sale/leaseback transaction, dated December 1, 2002, became due and payable on May 30, 2004.

EX-2

STOCK PLEDGE AGREEMENT

This Stock Pledge Agreement (this "Agreement") is entered as of December 16, 2004, by and among AURA SYSTEMS, INC., a Delaware corporation (the "Pledgor"), and KOYAH MICROCAP PARTNERS MASTER FUND, L.P., a Cayman Islands limited partnership ("Pledgee").

RECITALS

WHEREAS, in connection with a loan to the Pledgor by the Pledgee, (i) the Pledgor and the Pledgee entered into an Agreement dated as of the date hereof (the "Agreement"), (ii) the Pledgor executed in favor of the Pledgee a Convertible Promissory Note dated as of the date hereof (the "Note"), and (iii) the Pledgor executed in favor of Pledgee a Security Agreement dated as of the date hereof (the "Security Agreement");

WHEREAS, the Pledgee is to receive a pledge of and security interest in the 177,000 shares of Telemac Corporation described herein, and the Pledgor is to execute and deliver this Agreement to further evidence and effectuate such pledge and security interest; and

WHEREAS, the Pledgor previously granted: (i) a first-priority pledge of and security interest in the same 177,000 shares of Telemac Corporation in favor of Koyah Leverage Partners, L.P., as collateral agent (the "Koyah Collateral Agent") for itself and Koyah Partners, L.P., a Delaware limited partnership (collectively, "Koyah") to secure loans made by Koyah; and (ii) second-priority pledges of and security interests in the same 177,000 shares of Telemac Corporation in favor of Raven Partners, L.P., a Delaware limited partnership ("Raven"), and Koyah Ventures LLC, a Delaware limited liability company ("Ventures"), to secure loans made by Raven and Ventures.

NOW, THEREFORE, for valuable consideration, the receipt of which is hereby acknowledged, the parties do hereby agree as follows:

AGREEMENT

1. Definitions.
1. Certificates. "Certificates" means the certificate evidencing ownership of the Collateral.
2. Collateral. "Collateral" means One Hundred Seventy-Seven Thousand Seven Hundred and Seventy-Seven (177,777) shares of common stock of the Company, together with any and all substitutions, additions and proceeds of the foregoing, whether now owned or hereafter acquired.
3. Company. "Company" means Telemac Corporation, a Delaware corporation.
4. Default. "Default" has the meaning set forth in the Note.
5. Obligations. "Obligations" has the meaning set forth in the Security Agreement. For purposes of this Agreement and the Security Agreement, the term "Obligations" as used herein and therein shall specifically include any and all Obligations arising out of or in connection with the Note and this Agreement.
2. Pledge and Security Interest.

To secure the full and punctual payment and discharge of the Obligations, the Pledgor hereby pledges the Collateral to the Pledgee and grants to the Pledgee a continuing security interest in the Collateral. Such security interest of the Pledgee is (i) junior to the first-priority security interest granted to the Koyah Collateral Agent, (ii) junior to the second-priority security interests granted to Raven and Ventures, and (iii) subject to the terms and conditions of the Intercreditor Agreement (as defined below).

3. Location and Transfer of Collateral.

The Certificates are in the possession of the Koyah Collateral Agent (or its designee), under the terms of a Stock Pledge Agreement dated August 18, 2003 and shall remain in the possession of the Koyah Collateral Agent (or its designee) until such time as released by the Koyah Collateral Agent (or its designee). Upon such release, the Pledgor shall deliver the Certificates to Raven and Ventures. The Certificates shall remain in possession of Raven and Ventures until such time as released by Raven and Ventures. Upon such release, the Pledgor shall deliver (i) the Certificates to the Pledgee (or its designee) and (ii) stock power(s), duly executed in blank, for the Collateral to the Pledgee (or its designee). In the meantime, any possession of the Collateral by the Koyah Collateral Agent, Raven or Ventures shall be held on behalf of Koyah Collateral Agent, Raven, Ventures and the Secured Party, as their interests may appear.

4. Warranties and Covenants of the Pledgor.

The Pledgor represents and warrants, covenants and agrees as follows:

1. Ownership of Collateral. Except for the security interests in favor of the Koyah Collateral Agent, Raven, Ventures or any other parties to the Intercreditor Agreement (as defined below) from time to time, the Pledgor has good, valid marketable title to the Collateral, free from any liens, charges, pledges, security interests, encumbrances, rights to purchase or other claim or interest of any kind.
2. Liens. Except for the security interests in favor of the Koyah Collateral Agent, Raven, Ventures or any other parties to the Intercreditor Agreement from time to time, the Pledgor will neither create nor permit the creation of any lien charge, pledge, security interest, encumbrance, right to purchase or other claim or interest in the Collateral without the prior written consent of the Pledgee.
3. Security Interest. The Pledgee will at all times have a valid security interest in the Collateral, and will at all times have a perfected security interest in the Collateral after delivery thereof to Pledgee (or its designee).
4. Valid Issuance. The Collateral consists of validly issued, fully paid and nonassessable shares.
5. Transfers. Other than the transfers contemplated by this Agreement, the Pledgor will neither make nor permit any transfer of the Collateral without the prior written consent of the Pledgee.
6. Reimbursement of Expenses. The Pledgor will reimburse Pledgee for any expenses reasonably incurred by the Pledgee in protecting or realizing on the Collateral.
7. Placement of Legend. If requested by the Pledgee, the Pledgor shall place a legend on the Certificates stating that the shares represented by the Certificates are subject to the restrictions imposed by this Agreement.
8. Payment of Taxes and Indebtedness. The Pledgor shall promptly pay all liens, taxes, assessments, or contributions required by law which may come due and which are lawfully levied or assessed with respect to the Pledgor or any of the Collateral.
9. Company Consent. The Pledgor has obtained any and all required consents of the Company for the transactions contemplated by this Agreement, including without limitation the pledge of the Collateral.
10. Margin Regulations. The Collateral is not "margin stock" within the meaning of the Regulation U promulgated by the Board of Governors of the Federal Reserve System, and no part of the proceeds of the loans evidenced by the Notes will be used, whether directly or indirectly, or whether immediately, incidentally or ultimately, (a) to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock" or to refund indebtedness incurred for such purpose or (b) for any purpose which entails a violation of, or is inconsistent with, the provisions of Regulations U or X promulgated by such Board of Governors.

5. Exercise of Shareholder Rights.

(a) Receipt of Dividends and Distributions. Prior to the occurrence of a Default, the Pledgor shall have the right to receive and retain any ordinary dividends or other distributions paid on the Collateral.

(b) Right to Vote. Prior to the occurrence of a Default, the Pledgor may vote the Collateral for all purposes allowed within the restrictions set by this Agreement. The Pledgor agrees not to vote the Collateral or otherwise to act in any way which will adversely affect the value of the Collateral.

1. Remedies Upon Default.

(a) Pledgee May Register Shares. Upon the occurrence of a Default, the Pledgee may cause the Collateral to be transferred to the Pledgee's name and may exercise any right normally incident to the ownership of the Collateral, including the right to vote and to receive all dividends or other payments.

(b) Collateral. Upon the occurrence of a Default, the Pledgee may sell all or any part of the Collateral at public or private sale. The Pledgee may purchase all or any part of the Collateral at the sale. Proceeds of any sale shall be applied first to pay all costs and expenses related to the Default and sale of the Collateral, including all attorneys' fees, and second, to pay all amounts owed on the Obligations, with any excess to be returned to the Pledgor.

(c) Remedies Cumulative. Upon the occurrence of a Default, the Pledgee shall have all rights and remedies available to them at law or in equity, including all rights available under the Uniform Commercial Code, and all rights and remedies granted under this Agreement, the Note, the Security Agreement and any other related documents or agreements. These rights and remedies shall be cumulative, and may be exercised singly or concurrently with all other rights and remedies the Pledgee may have.

(d) Order of Realization on the Collateral. The Pledgee may realize upon the Collateral, as well as any other collateral, in any order.

(e) Acknowledgments and Agreements of Pledgor. The Pledgor hereby acknowledges and agrees (i) that the Pledgor hereby waives all rights of redemption, stay, valuation and appraisal under any applicable laws, (ii) that ten (10) days prior written notice of the Pledgee's intention to make any sale of the Collateral is commercially reasonable notice, (iii) that the requirements of federal and state securities laws may limit the Pledgee's sale of all or part of the Collateral as well as the extent or manner in which any subsequent transferee could dispose of the same, (iv) in light of such restrictions, the Pledgee may effect a private sale to one or more purchasers who will agree, among other things, to acquire the Collateral for their own account, for investment, and not with a view to the distribution or resale thereof, (v) that the Pledgee may proceed to make such a sale whether or not a registration statement for the purpose of registering the Collateral sh all have been filed and may approach and negotiate with a single potential purchaser to effectuate such sale, (vi) any such sale might result in prices or other terms less favorable than if such sale were a public sale without such restrictions, and the Pledgee shall incur no liability for selling any Collateral under such circumstances, and (vii) the foregoing shall apply not withstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Pledgee sells.

(f) Registration. The Pledgor hereby assigns to the Pledgee, upon the occurrence of a Default, all registration rights the Pledgor now has or may hereafter acquire with respect to the Collateral. If the Pledgees desires to sell any of the Collateral at a public sale, the Pledgor will, upon request of the Pledgee, use its best efforts to cause the issuer of the Collateral to register the Collateral under federal and state securities laws and maintain the effectiveness of such registration, to the extent consistent with such registration rights. The Pledgor further agrees to indemnify, defend and hold harmless the Pledgee, any underwriter and their respective officers, directors, affiliates and controlling persons from and against all loss, liability, expenses, costs of counsel and claims (including the costs of investigation) that they may incur in so far as such loss, liability, expense or claim arising out of or is based upon any alleged untrue statement of a material fa ct contained in any prospectus, or arises out of or is based upon any alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except in so far as they may have been caused by any untrue statement or omission based upon the information furnished in writing by the Pledgee expressly for use therein. The Pledgee will bear all costs and expenses of carrying out the foregoing obligations on its part. The Pledgor acknowledges and agrees that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced.

(g) Rights of Other Creditors. The security interest of the Pledgee and the rights of the Pledgee upon the occurrence of any Default or otherwise under this Agreement shall be subject to (i) the senior first-priority security interest of the Koyah Collateral Agent and the senior second-priority security interests of Raven and Ventures and (ii) the rights of the Koyah Collateral Agent, Raven and Ventures upon the occurrence of any default or otherwise under their security documents.

7. Termination of Agreement.

This Agreement shall remain in full force and effect until the Obligations have been fully and finally discharged.

8. Miscellaneous.

(a) Waiver. No right or obligation under this Agreement will be deemed to have been waived unless evidenced by a writing signed by the party against which the waiver is asserted or by its duly authorized representative. Any waiver will be effective only with respect to the specific instance involved, and will not impair or limit the right of the waiving party to insist upon strict performance of the right or obligation in any other instance, in any other respect, or at any other time.

(b) Notice. Any notice or other communication required or permitted under this Agreement shall be in writing and shall addressed to the party to which it is directed at such party's address or fax number set forth in the Note.

(c) Modifications to Be in Writing. To be effective, any modification to this Agreement must be in writing signed by all parties to the Agreement.

(d) Agreement Binding upon Successors and Assigns. This Agreement shall bind the Pledgor and its successors and assigns. All rights, privileges, and powers granted to the Pledgee under this Agreement shall benefit the Pledgee and its successors and assigns.

(e) Assignment of Agreement. At any time, the Pledgee may assign or transfer any of its rights or powers under this Agreement to any person or entity. The Pledgor may not transfer its rights, duties, or obligations under this Agreement without the prior written consent of the Pledgee.

(f) Further Assurances. Both the Pledgor and the Pledgee agree to take any further actions and to make, execute, and deliver any further written instruments which may be reasonably required to carry out the terms, provisions, intentions, and purposes of this Agreement.

(g) Governing Law. Consistent with the governing law and venue provision of the Intercreditor Agreement, this Agreement shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties hereto, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non-conveniens. Notwithstanding the foregoing, any party obtaining any order or judgment in any of the above referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.

(h) Costs and Expenses. The Pledgor hereby agrees to pay to the Pledgee upon demand all costs and expenses, including attorney's fees, incurred in connection with the administration of this Agreement, including without limitation all filings or other actions required by the Pledgee in connection with perfecting or otherwise protecting the security interest granted hereunder. In addition, the Pledgor hereby agrees to pay to the Pledgee upon demand all costs and expenses, including attorney's fees, incurred in connection with the enforcement of this Agreement, collection of the Obligations and the protection, preservation, collection or sale of or other realization upon the Collateral, including without limitation in any out-of-court workout, any court action, any appeal or any bankruptcy proceeding.

(i) Severability. If any provision of this Agreement or any application of any provision is determined to be unenforceable, the remainder of this Agreement shall be unaffected. If the provision is found to be unenforceable when applied to particular persons or circumstances, the application of the provision to other persons or circumstances shall be unaffected.

(j) Headings. Headings used in this Agreement have been included for convenience and ease of reference only, and will not in any manner influence the construction or interpretation of any provision of this Agreement.

(k) Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original and all of which together will constitute a single agreement.

(l) Intercreditor Agreement. The terms and conditions of this Agreement shall also be governed by and subject to the terms and conditions of an Intercreditor Agreement dated as of January 19, 2004, as supplemented by a Joinder Agreement dated as of June 14, 2004, among the Pledgor, Koyah, Raven and Ventures, to which the Pledgee is being added as an additional party pursuant to a Joinder Agreement dated as of the date hereof (collectively, the "Intercreditor Agreement").

[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first set forth above.

"Pledgor"

AURA SYSTEMS, INC.

By:

Name:

Title:

"Pledgee"

KOYAH MICROCAP PARTNERS MASTER

FUND, L.P.

By: Koyah Ventures LLC, its general partner

By:

Name:

Title:

I:\Spodocs\28601\00024\agree\00280932.DOC:lg

EX-3

SECURITY AGREEMENT

This Security Agreement (this "Agreement") is entered into as of December 16, 2004, by AURA SYSTEMS, INC. a Delaware corporation (the "Debtor"), for the benefit of KOYAH MICROCAP PARTNERS MASTER FUND, L.P., a Cayman Islands limited partnership (the "Secured Party").

R E C I T A L S :

1. The Debtor has requested that the Secured Party extend a loan to the Debtor.
2. Such loan is to be evidenced by a Convertible Promissory Note dated the date hereof made by the Debtor in favor of the Secured Party (the "Note").
3. Secured Party has required, as a condition of making such loan, that the Debtor grant a security interest in all of its personal property to secure such loan and any other present or future obligations of the Debtor.
4. In order to induce the Secured Party to make such loan, the Debtor is willing to grant such security interest as further provided herein.
5. Debtor has previously granted: (i) a first-priority security interest in the same collateral in favor of Koyah Leverage Partners, L.P., a Delaware limited partnership, as collateral agent (the "Koyah Collateral Agent") for itself and Koyah Partners, L.P. a Delaware limited partnership (collectively "Koyah") to secure loans made by Koyah; and (ii) second-priority security interests to Raven Partners, L.P., a Delaware limited partnership ("Raven") and Koyah Ventures LLC, a Delaware limited liability company ("Ventures"), to secure loans made by Raven and Ventures.

NOW, THEREFORE, the Debtor hereby agrees with the Secured Party as follows:

ARTICLE I. DEFINITIONS

Unless otherwise defined herein, any terms used herein (whether or not capitalized, such as "accounts," "inventory" and "equipment") which are defined in the Uniform Commercial Code as enacted in the State of Washington, as amended from time to time, shall have the meaning assigned to such term therein. Unless otherwise defined herein, any capitalized terms used herein which are defined in the Note shall have the meaning assigned to them therein. In addition, the following terms shall have the meaning set forth below:

"Collateral" means all of the Debtor's personal property and fixtures of every nature whether tangible or intangible and whether now owned or hereafter acquired, wherever located, including without limitation the following:

(i) (a) All goods; (b) all inventory, merchandise, and personal property held for sale or lease or furnished or to be furnished under contracts of service, all raw materials, work in process, or materials used or consumed in Debtor's business, wherever located and whether in the possession of the Debtor, a warehouseman, a bailee, or any other person; (c) all equipment, machinery, tools, office equipment, supplies, furnishings, furniture, or other items used or useful, directly or indirectly, in the Debtor's business, (d) all fixtures; and (e) all substitutes and replacements therefor, all accessions, attachments, and other additions thereto, all tools, parts and supplies used in connection therewith, all packaging, manuals, warranties and instructions related thereto, and all leasehold or equitable interests therein;

(ii) (a) All accounts, accounts receivable, contract rights, contracts receivable, purchase orders, notes, drafts, acceptances, and other rights to payment and receivables; (b) all chattel paper (whether tangible or electronic), documents and instruments (including promissory notes); (c) all money and deposit accounts; (d) all letter of credit rights (whether or not the letter of credit is evidenced by a writing), rights under security, guaranties or other supporting obligations, tort claims and proceeds, insurance claims and proceeds, and tax refund claims and proceeds; (e) all securities and other investment property; (f) all general intangibles and payment intangibles, (g) all patents and patent applications and registrations, trademarks and trademark applications and registrations, service marks and service mark applications and registrations, and copyrights and copyright applications and registrations (collectively the "Patents, Trademarks and Copyrights"), including without limitation the patents, patent applications, trademarks and trademark applications and copyrights and copyright applications owned by the Debtor on Schedule 1 hereto, or licensed to the Debtor on Schedule 2 hereto; (h) all trade names, trade styles, goodwill, inventions, designs, methods, processes, technology, know-how, intellectual property, drawings, specifications, blue prints, confidential information, trade secrets, customer lists, supplier lists, software and computer programs, mask works, and mask work applications and registrations, goodwill, license agreements, franchise agreements and other licenses, permits, franchises, and agreements of every kind and nature pursuant to which the Debtor possesses, uses or has authority to possess or use any property (whether tangible or intangible) of the Debtor or pursuant to which others possess, use or have authority to possess or use any property (whether tangible or intangible) of the Debtor, and infringement and commercial tort claims; a nd (i) all business records, software, writings, plans, specifications, schematics, and other recorded data in any form; and

(iii) All products and proceeds of the foregoing and all other property received or receivable in disposition of or exchange of the foregoing.

"Event of Default" means any default in payment or performance of the Obligations.

"Obligations" means any and all obligations and liabilities of every nature of the Debtor to the Secured Party, whether now existing or hereafter incurred, including without limitation those arising out of or in connection with the Note, this Agreement or any other agreements with the Secured Party. The Obligations shall specifically include any and all principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy, would accrue on such obligations), fees, expenses, indemnities or other obligations or liabilities, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created, or incurred, as well as any and all of such obligations or liabilities that are paid, to the extent such payment is avoided or recovered directly or indirectly from the Secured Party as a prefere nce, fraudulent transfer, or otherwise, together with any and all amendments, modifications, extensions or renewals of the foregoing.

ARTICLE II. GRANT OF SECURITY INTEREST

To secure the payment and performance of the Obligations, the Debtor hereby grants a continuing security interest in the Collateral, and assigns the Collateral, to the Secured Party. Such security interest of the Secured Party is (i) junior to the first-priority security interest previously granted to the Koyah Collateral Agent, (ii) junior to the second-priority security interests granted in favor of Raven and Ventures, and (iii) subject to the terms and conditions of the Intercreditor Agreement (as defined below).

ARTICLE III. COVENANTS OF THE DEBTOR

The Debtor shall fully perform each of the covenants set forth below.

3.1 Further Documentation

Promptly upon request of the Secured Party and at the Debtor's expense, the Debtor (a) shall prepare, execute, deliver and file any financing statement, any filing with the Patent and Trademark Office, Copyright Office or other applicable office, and any renewal, substitution or correction thereof or any other document and shall take any such further action as the Secured Party may require in perfecting or protecting the security interested granted by the Debtor under this Agreement or in otherwise obtaining the full benefits of this Agreement and (b) authorizes the Secured Party to prepare, execute, deliver and file any such documents and to take any such actions on behalf of the Debtor.

3.2 Patents, Trademarks and Copyrights

Schedule 1 lists all Patents, Trademarks and Copyrights currently owned by the Debtor. Promptly upon any change in the Patents, Trademarks and Copyrights owned by the Debtor, the Debtor shall provide the Secured Party with an updated Schedule 1 listing all Patents, Trademarks and Copyrights then owned by the Debtor. Schedule 2 lists all Patents, Trademarks and Copyrights currently licensed to the Debtor by third parties. Promptly upon any change in the Patents, Trademarks and Copyrights licensed to the Debtor, the Debtor shall provide the Secured Party with an updated Schedule 2 listing all Patents, Trademarks and Copyrights then licensed to the Debtor.

3.3 Pledges

Following (i) payment of all obligations owed to Koyah and release of the Koyah Collateral Agent's security interest in the Collateral and (ii) payment of all obligations owed to Raven and Ventures and release of the security interests granted in favor of Raven and Ventures, upon request of the Secured Party and at Debtor's expense, the Debtor shall promptly deliver and pledge to the Secured Party, endorsed or accompanied by instruments of assignment or transfer satisfactory to the Secured Party, any Collateral consisting of instruments, investment property, documents, general intangibles or chattel paper. In the meantime, any possession of such Collateral by the Koyah Collateral Agent, Raven and/or Ventures shall be held on behalf of the Koyah Collateral Agent, Raven, Ventures and Secured Party, as their interests may appear.

3.4 Control

Following (i) payment of all obligations owed to Koyah and release of the Koyah Collateral Agent's security interest in the Collateral and (ii) payment of all obligations owed to Raven and Ventures and release of the security interests granted in favor of Raven and Ventures, upon request of the Secured Party and at Debtor's expense, the Debtor shall cooperate with the Secured Party in obtaining control with respect to any Collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper. In the meantime, any control of such Collateral by the Koyah Collateral Agent, Raven and/or Ventures shall be held on behalf of the Koyah Collateral Agent, Raven, Ventures and Secured Party, as their interests may appear.

3.5 Maintenance of Records

The Debtor shall keep and maintain satisfactory and complete records of the Collateral including but not limited to a record of all payments received and all credits granted with respect to the Collateral and all other dealings with the Collateral. The Debtor shall mark its books and records pertaining to the Collateral to evidence this Agreement and the security interest granted herein. Promptly upon request of the Secured Party, the Debtor shall deliver and turn over to the Secured Party copies of all books and records pertaining to the Collateral.

3.6 Liens

Except for (i) existing licenses of Patents, Trademarks and Copyrights by the Debtor to third parties set forth on Schedule 3 and (ii) liens in favor of the Koyah Collateral Agent, Raven and Ventures or liens in favor of any other parties to the Intercreditor Agreement (as defined below) from time to time, the Debtor owns the Collateral free and clear of liens, charges, pledges, security interests, encumbrances or other claims or interests in the Collateral, and the Debtor will neither create nor permit the existence of any of the foregoing without the prior written consent of the Secured Party. Notwithstanding the foregoing, the Secured Party hereby waives any breach of the covenant set forth above arising from the existing liens set forth on Schedule 4, so long as the Debtor otherwise remains in compliance with all of the provisions of the Transaction Documents (as defined in the Agreement dated as of the date hereof between the Debtor and the Secured Party) and this Agreement.

3.7 Disposition of Collateral

The Debtor shall not sell, license, lease, transfer or otherwise dispose of any of the Collateral without the prior written consent of the Secured Party, except for sales of inventory, collection of rights to payment, and disposition of equipment or inventory which is obsolete or being replaced, all in the ordinary course of business in accordance with past practices.

3.8 Limitations on Amendments, Modifications, Terminations, Waivers and Extensions of Contracts and Agreements Giving Rise to Accounts

Without the prior written consent of Secured Party, the Debtor will not (a) amend, modify, terminate, waive or extend any provision of any agreement giving rise to an account, general intangible, instrument, chattel paper or other right to payment, licensing any Patents, Trademarks or Copyrights to the Debtor or by the Debtor or otherwise relating to the Collateral, in any manner that could reasonably be expected to have a material adverse effect on the value of any Collateral or (b) fail to exercise promptly and diligently every material right that it may have under each such agreement, other than any right of termination (which shall only be exercised with the prior written consent of the Secured Party).

3.9 Indemnification

The Debtor agrees to pay, and to indemnify the Secured Party and hold the Secured Party harmless from, all liabilities, costs and expenses (including legal fees and expenses) in connection with protecting or realizing on the Collateral, enforcing any rights or remedies of the Secured Party or otherwise arising out of this Agreement. In any suit, proceeding or action brought by the Secured Party under any account or other right to payment to enforce payment of any sum owing thereunder or to enforce any provisions of any account or other right to payment, the Debtor will indemnify the Secured Party and hold the Secured Party harmless from all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment, reduction or liability whatsoever of any account debtor thereunder arising out of a breach by the Debtor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or its successors from the Debtor.

3.10 Further Identification of Collateral

The Debtor will furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may request, all in reasonable detail.

3.11 Notices

The Debtor will advise the Secured Party promptly in reasonable detail (a) of any lien, charge, pledge, security interest, encumbrance or other claim or interest asserted against any of the Collateral and (b) of the occurrence of any other event that could reasonably be expected to have a material adverse effect on the Collateral.

3.12 Changes in Locations, Name, Etc.

The Debtor will not (a) change its state of organization, (b) change the location of its chief executive office/chief place of business or remove its books and records from the locations set forth in Schedule 5 to this Agreement or (c) change its name, identity or structure to such an extent that any financing statement filed by the Secured Party in connection with this Agreement would become ineffective or seriously misleading, unless it shall have given the Secured Party at least 30 days prior written notice thereof.

3.13 Further Assurances

The Debtor agrees to take all actions which the Secured Party may request to perfect or maintain the perfection of, or to otherwise protect, the security interest granted herein and the Debtor authorizes the Secured Party to take such actions on behalf of the Debtor, including without limitation (a) filing (including electronic or facsimile filing) financing statements describing the Collateral, which may include descriptions broader than as set forth in this Agreement and (b) filing any documents with the Patent and Trademark Office, Copyright Office or any other applicable office. The Debtor agrees that where allowed by law, a carbon, photographic or other reproduction of a financing statement or this Agreement is sufficient as a financing statement.

3.14 Insurance

The Debtor (a) will keep the Collateral continuously insured at its expense against fire, theft, and other hazards in amounts and with insurers as shall be sufficient to fully protect the Collateral, as reasonably approved by the Secured Party, (b) will include in such policies of insurance to the Secured Party clauses making any loss payable to the Secured Party as its interest may appear and agreeing to notify Secured Party of any cancellation or threatened cancellation not less than 30 days prior to the effective date of such cancellation and (c) will deliver copies of such policies of insurance to the Secured Party upon request.

ARTICLE IV. REPRESENTATIONS AND WARRANTIES

The Debtor hereby makes the following representations and warranties:

4.1 Title to Collateral

Except for liens in favor of the Koyah Collateral Agent, Raven and Ventures or liens in favor of any other parties to the Intercreditor Agreement from time to time, the Debtor has good and marketable title to all of the Collateral, free and clear of all liens, charges, pledges, security interests, encumbrances or other claims or interests. Notwithstanding the foregoing, the Secured Party hereby waives any breach of the representation and warranty set forth above arising from the existing liens set forth on Schedule 4, so long as the Debtor otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement.

4.2 No Impairment of Collateral

None of the Collateral shall be impaired or jeopardized because of the security interest granted herein.

4.3 Other Agreements

The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof will not result in the breach of any of the terms, conditions, or provisions of, or constitute a default under, or conflict with or cause any acceleration of any obligation under any agreement or other instrument to which the Debtor is a party or by which the Debtor is bound or result in the violation of any applicable law.

4.4 No Approvals

No approvals of any governmental entity or third party are required in connection with the security interest herein granted.

4.5 Authority

The Debtor has full power and authority to grant to the Secured Party a security interest in the Collateral.

4.6 Location of Records

The address(es) of the office where the books and records of the Debtor are kept concerning the Collateral is set forth on Schedule 5 to this Agreement.

4.7 State of Organization

The Debtor's state of organization is set forth on Schedule 5 to this Agreement.

4.8 Chief Executive Office

The Debtor's chief executive office and chief place of business is located at the address set forth on Schedule 5 to this Agreement.

4.9 Trade Names

The Debtor conducts its business only under its legal name except for any additional trade names set forth on Schedule 5 to this Agreement.

ARTICLE V. THE SECURED PARTY'S RIGHTS WITH RESPECT TO THE COLLATERAL

5.1 No Duty on the Secured Party's Part

The Secured Party shall not be required to realize upon any Collateral, except at its option upon the occurrence of any Event of Default; collect the principal, interest or payment due thereon or exercise any rights or options of the Debtor pertaining thereto; make presentment, demand or protest; give notice of protest, nonacceptance or nonpayment; or do any other thing for the protection, enforcement or collection of any Collateral. The powers conferred on the Secured Party hereunder are solely to protect the Secured Party's interests in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers. The Secured Party shall be accountable only for amounts that it actually received as a result of the exercise of such powers; and shall not be responsible to the Debtor for any act or failure to act hereunder.

5.2 Negotiations with Account Debtors

Upon the occurrence of any Event of Default, the Secured Party may, in its sole discretion, extend or consent to the extension of the time of payment or maturity of any instruments, accounts, chattel paper, general intangibles or other rights to payment.

5.3 Right to Assign

The Secured Party may assign or transfer the whole or any part of the Obligations and may transfer therewith as collateral security the whole or any part of the Collateral; and all obligations, rights, powers and privileges herein provided shall inure to the benefit of the assignee and shall bind the successors and assigns of the parties.

5.4 Duties Regarding Collateral

Beyond the safe custody thereof, the Secured Party shall not have any duty as to any Collateral in its possession or control, or as to any preservation of any rights of or against other parties.

5.5 Collection From Account Debtors

Upon the occurrence of any Event of Default, the Debtor shall, upon demand by the Secured Party (and without any grace or cure period), notify all account debtors to make payment to the Secured Party of any amounts due or to become due. The Debtor authorizes the Secured Party to contact the account debtors for the purpose of having all or any of them pay their obligations directly to the Secured Party. Upon demand by the Secured Party, the Debtor shall enforce collection of any indebtedness owed to it by account debtors.

5.6 Inspection

The Secured Party and its designees, from time to time at reasonable times, may inspect, audit and make copies of and extracts from all records and all other papers in the possession of the Debtor in connection with the Collateral.

ARTICLE VI. THE SECURED PARTY'S RIGHTS AND REMEDIES

6.1 Acceleration; Remedies

Upon the occurrence of any Event of Default, the Secured Party shall have all rights and remedies available to it under the Note, this Agreement, and any other documents or agreements or available at law or in equity, including without limitation the Uniform Commercial Code. The Secured Party may proceed to enforce any or all of such rights and remedies or realize on any or all security or guaranties for the Obligations in any manner or order it deems expedient without regard to any equitable principles of marshaling or otherwise. No failure or delay on the part of the Secured Party in exercising any right, power or privilege hereunder and no course of dealing shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any right, power or privilege. The rights and remedies of the Secured Party are cumulative and not exclusive of any rights or remedies that the Se cured Party would otherwise have. No notice to or demand on the Debtor, in any case, shall entitle the Debtor to any other or further notice or demand in similar or other circumstances or shall constitute a waiver of the right of the Secured Party to any other or further action in any circumstances without notice or demand.

6.2 Notice of Sale

The Debtor hereby acknowledges and agrees that written notice mailed to the Debtor at the address designated herein ten days prior to the date of public or private sale of any of the Collateral shall constitute commercially reasonable notice.

6.3 Disposition of Collateral

In addition to all other rights and remedies available to the Secured Party upon the occurrence of an Event of Default, the Secured Party may dispose of any of the Collateral at public or private sale in its then present condition or following such preparation and processing as the Secured Party deems commercially reasonable. Such sale may include licensing of the Collateral on an exclusive or non-exclusive basis, on a worldwide or geographically limited basis and on an all-uses or limited uses basis. For the purpose of enabling the Secured Party to exercise its rights and remedies hereunder, the Debtor hereby grants to the Secured Party an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to the Debtor) to use, license or sub-license any of the Collateral, including in such license access to all media in which any of the Collateral may be recorded or stored and to all computer software and programs used for the compilation or printout the reof. The Secured Party has no duty to prepare or process the Collateral prior to sale. The Secured Party may disclaim warranties of title, possession, quiet enjoyment and the like. Such actions by the Secured Party shall not affect the commercial reasonableness of the sale. Further, the Secured Party may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.

6.4 Rights of Other Creditors

The security interest of the Secured Party and the rights of the Secured Party upon the occurrence of any Event of Default or otherwise under this Agreement shall be subject to (i) the senior first-priority security interest of the Koyah Collateral Agent and the senior second-priority security interests of Raven and Ventures and (ii) the rights of the Koyah Collateral Agent, Raven and Ventures upon the occurrence of any event of default or otherwise under their security documents.

ARTICLE VII. GENERAL PROVISIONS

7.1 The Secured Party's Appointment as Attorney-in-Fact

(a) The Debtor hereby irrevocably constitutes and appoints the Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Debtor and in the name of the Debtor or in its own name, from time to time in the Secured Party's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this Agreement; and without limiting the generality of the foregoing, the Debtor hereby gives the Secured Party the power and right, on behalf of the Debtor, without consent by or notice to the Debtor, to do the following:

(i) upon the occurrence of any Event of Default, to transfer to the Secured Party or to any other person all or any of the Collateral, to endorse any instruments pledged to the Secured Party and to fill in blanks in any transfers of Collateral, powers of attorney or other documents delivered to the Secured Party;

(ii) to pay or discharge taxes and liens levied or placed on or threatened against the Collateral;

(iii) upon the occurrence of any Event of Default, (A) to take possession of, endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any account, instrument or general intangible or with respect to any other Collateral and (B) to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Secured Party for the purpose of collecting all such moneys due under any account, financial assets, instrument, investment property, or general intangible or with respect to any other Collateral whenever payable; and

(iv) upon the occurrence of any Event of Default, (A) to direct any party liable for any payment under any of the Collateral to make payment of all moneys due or to become due thereunder directly to the Secured Party or as the Secured Party shall direct; (B) to ask for, demand, collect and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Debtor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharge or releases as the Secured Party may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Secured Party were the absolute owner thereof for all purposes; and to do, at the Secured Party's option and the Debtor's expense, at any time or from time to time, all acts and things that the Secured Party deems necessary to protect, preserve or realize upon the Collateral and the Secured Party's security interest therein and to effect the intent of this Agreement, all as fully and effectively as the Debtor might do.

(b) The Debtor hereby ratifies all that such attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable.

(c) The Debtor also authorizes the Secured Party, at any time and from time to time, to execute, in connection with the sale provided for in Article VI hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral.

(d) The powers conferred on the Secured Party hereunder are solely to protect the Secured Party's interests in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers. The Secured Party shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act hereunder.

(e) The Debtor shall pay or reimburse the Secured Party for all costs and expenses, including attorneys fees, incurred by the Secured Party while acting as the Debtor's attorney-in-fact hereunder.

7.2 Termination of Agreement

This Agreement shall remain in full force and effect until the Obligations have been fully and finally discharged.

7.3 Severability

If any provision of this Agreement is for any reason and to any extent determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Agreement will be unaffected and interpreted so as best to reasonably effect the intent of the parties hereto. Such void or unenforceable provision of this Agreement shall be replaced with a valid and enforceable provision so as to achieve, to the greatest extent possible, the economic, business and other purposes of the void or unenforceable provision.

7.4 Waiver

No waiver by any party of any breach of any provision hereof shall constitute a waiver of any other breach of that or any other provision hereof.

7.5 Assignment

All rights, powers, privileges and immunities herein granted to the Secured Party shall extend to their successors and assigns and any other legal holder of the Obligations or this Agreement, with full right by the Secured Party to assign and/or sell the same.

7.6 Successors

The rights and obligations of the parties hereto shall inure to the benefit of, and be binding and enforceable upon, the respective successors and assigns of the parties.

7.7 Entire Agreement

This Agreement constitutes the entire agreement of the parties hereto concerning the subject matter hereof, all prior discussions, proposals, negotiations and understandings having been merged herein. This Agreement or any provision hereof may be (i) modified or amended, but only by a writing signed by all parties at such time or (ii) waived (either generally or in a particular instance, either retroactively or prospectively, either for a specified period of time or indefinitely, either with or without consideration), but only by a writing signed by the party granting such waiver.

7.8 Intercreditor Agreement.

The terms and conditions of this Agreement shall also be governed by and subject to the terms and conditions of an Intercreditor Agreement dated as of January 19, 2004, as supplemented by a Joinder Agreement dated as of June 14, 2004, among the Company, Koyah, Raven and Ventures, to which the Secured Party is being added as an additional party pursuant to a Joinder Agreement dated as of the date hereof (collectively, the "Intercreditor Agreement").

7.9 Governing Law; Jurisdiction; Venue; Jury Trial

Consistent with the governing law and venue provisions of the Intercreditor Agreement, this Agreement shall be governed by, and interpreted under, the laws of the State of Washington applicable to contracts made and to be performed therein, without giving effect to the principles of conflicts of law. The parties hereby (i) agree that any legal suit, action or proceeding arising out of or relating to this Agreement must be instituted in a federal or state court located in the County of Spokane, State of Washington, (ii) irrevocably submit to the jurisdiction of any such court and waive any objection to the laying of venue in, or the inconvenience of, such forum and (iii) irrevocably waives all rights to trial by jury in any action, suit or proceeding arising out of or related to this Agreement, the Note or any other agreement or document between the Debtor and the Secured Party.

7.10 Notices

All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial messenger or courier service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with acknowledgment of complete transmission) to each party at the address (or at such other address for a party as shall be specified by like notice) set forth below; provided, however, that notices sent by mail will not be deemed given until received.

Aura Systems, Inc.

2335 Alaska Avenue

El Segundo, CA 90245

Attn: Neal Meehan

Fax: 310-643-8719

Koyah Microcap Partners Master Fund, L.P.

c/o ICM Asset Management, Inc.

W. 601 Main Avenue, Suite 600

Spokane, WA 99201

Attn: Robert Law

Fax: 509-444-4500

7.11 Costs and Expenses

The Debtor hereby agrees to pay to the Secured Party upon demand all costs and expenses, including attorney's fees, incurred in connection with the administration of this Agreement, including without limitation all filings or other actions required by the Secured Party in connection with perfecting or otherwise protecting the security interest granted hereunder. In addition, the Debtor hereby agrees to pay to the Secured Party upon demand all costs and expenses, including attorney's fees, incurred in connection with the enforcement of this Agreement, collection of the Obligations and the protection, preservation, collection or sale of or other realization upon the Collateral, including without limitation in any out-of-court workout, any court action, any appeal or any bankruptcy proceeding.

7.12 Counterparts

This Agreement may be executed in any number of counterparts, each of each of which will be an original, but all of which together will constitute one and the same instrument.

7.13 Title and Subtitles

The titles of the sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the Debtor and the Secured Party have caused this Agreement to be duly executed as of the day and year first above written.

"Debtor"

AURA SYSTEMS, INC.

By:

Name:

Title:

"Secured Party"

KOYAH MICROCAP PARTNERS MASTER

FUND, L.P.

By: Koyah Ventures LLC, its general partner

By:

Name:

Title:

I:\Spodocs\28601\00024\agree\00280910.DOC

SCHEDULE 1

Patent and Patent Applications,

Trademark and Trademark Applications

and

Copyrights and Copyright Applications Owned by the Debtor

1. Patents.

Any and all domestic and foreign patent registrations, patent applications, patentable invention rights or patent-related rights to current and future interests owned by Debtor or assigned to Debtor, including but not restricted to the following patent registrations and patent applications:

Domestic Patent Registrations

Reg. Number	Title
4,892,328	Electromagnetic Strut Assembly
4,912,343	Electromagnetic Actuator
4,969,662	Active Damping System for an Automobile Suspension
4,979,789	Continuous Source Scene Projector
5,032,906	Intensity Calibration Method for Scene Projector
5,035,475	Unique Modulation Television
5,085,497	Method for fabricating mirror array for Optical Projection System
5,099,158	Electromagnetic Actuator
5,126,836	Actuated Mirror Optical Intensity Modulation
5,135,070	Active Hydraulic Pressure Control
5,138,309	Electronic Switch Matrix for a Video Display System
5,150,205	Actuated Mirror Optical Intensity Modulation
5,159,225	Piezoelectric Actuator
5,162,767	High Efficiency Solenoid
5,175,465	Piezoelectric and Electrostructive Actuators
5,185,660	Actuated Mirror Optical Intensity Modulation
5,187,398	Electromagnetic Actuator
5,207,239	Variable Gain Servo Assist
5,212,977	Electromagnetic Re-draw Sleeve Actuator
5,222,714	Electromagnetically Actuated Valve
5,245,369	Scene Projector
5,260,798	Pixel Intensity Modulator
5,278,953	Machine Tool Fixture Computer Aided Setup
5,285,995	Optical Table Active Leveling and Vibration Cancellation System
5,307,665	Electromagnetic Re-draw Sleeve Actuator
5,309,050	Ferromagnetic Wire Electromagnetic Actuator
5,325,699	Electromagnetic Re-draw Sleeve Actuator
5,334,265	Magnetic Material
5,341,054	Low Mass Electromagnetic Actuator
5,350,153	Core Design for Electromagnetic Actuated Valve
5,352,101	Electromagnetically Actuated Compressor Valve
5,354,185	Electromagnetically Actuated Reciprocating Compressor Driver
5,355,108	Electromagnetically Actuated Compressor Valve
5,481,396	Thin Film Actuated Mirror Array
5,548,263	Electromagnetically Actuated Valve
5,589,084	Thin Film Actuated Mirror Array
5,616,982	Piezoelectric Actuator
5,689,380	Thin Film Actuated Mirror Array for Providing Double Tilt Angle
5,710,657	Monomorph Thin Film Actuated Mirror Array
5,720,468	Stagerred Electromagnetically Actuated Valve Design
5,721,694	Non-linear Deterministic Stochastic Filtering Method and System
5,734,217	Induction Machine using Ferromagnetic Conducting Material in Rotor
5,768,392	Blind Adaptive Filtering of Unknown Signals in Unknown Noise in Quasi-closed Loop System
5,768,395	Double Ended Field Coil Actuator
5,772,179	Hinged Armature Electromagnetically Actuated Valve
5,780,958	Piezoelectric Vibrating Device
5,782,454	Electromagnetically Actuated Valve
5,796,377	Video Display System having an Electronic Switch Matrix for controlling an MSN array of Piezoelectric Members
5,822,370	Compression/Decompression for Preservation of High Fidelity Speech Quality at Low Bandwidth
5,898,244	Dual Directional Field Coil Actuator
6,032,113	N-Stage Predicted Feedback-Based Compression and Decompression of Spectra of Stochastic Data Using Convergent Incomplete Autoregressive Models
6,157,175	Mobile Power Generation System
6,158,403	Servo Control System for an Electromagnetic Valve Actuator used in an Internal Combustion Engine
6,267,351	Electromagnetic Valve Actuator with Mechanical End Position Clamp or Latch
D355,751	Video Game Accessory Vest
D393,447	Adapter Plug
5,097,510	Artificial Intelligence Pattern Recognition-based Noise Reduction System for Speech Processing
5,140,640	Noise Cancellation System
5,589,725	Monolithic Prestressed Ceramic Devices and Method for making same
4,998,441	Force and Torque Measurement System
5,321,762	Voice Coil Actuator
5,418,860	Voice Coil Excursion and Amplitude Gain Control Device
5,424,592	Electromagnetic Transducer
5,434,458	Voice Coil Actuator
5,536,984	Voice Coil Actuator
5,539,262	Axially Focused Radial Magnet Voice Coil Actuator
5,624,155	Electromagnetic Transducer
5,652,801	Resonance Damper for Piezoelectric Transducer
5,727,076	Audio Transducer having Piezoelectric Device
5,736,808	Piezoelectric Speaker
5,786,741	Polygon Magnet Structure for Voice Coil Actuator
6,082,315	Electromagnetic Valve Actuator
D363,270	Adapter Plug
D364,162	Amplifier Housing
D364,167	Speaker Motor Case
D394,063	Pair of Speaker Enclosures
D396,723	Speaker Basket
D449,828	Speaker Basket

Domestic Patent Applications

Serial Number	Title
09/799,973	Switched Reluctance Motor Delivering Constant Torque From Three Phase Sinusoidal Voltages
09/939,116	Mobile power generation system
09/938,967	Bi-directional power supply circuit

Foreign Patent Applications

PCT Number	Title
US00/03815	Mobile Power Generation System (Europe, title not verified)
US01/50683	Mobile power generation system (Europe & Canada, title not verified)
US01/50762	Bi-directional power supply circuit (Europe, title not verified)

2. Trademarks.

Any and all domestic and foreign trademark registrations, trademark applications, trade and service mark rights, or other trademark-related rights to current and future interests owned by Debtor or assigned to Debtor, including but not restricted to the following trademark registrations and trademark applications:

Serial Number	Reg. Number	Word Mark
75547751		AMA
75225690	2128907	ASPECT
75559987	2372115	AURA
74472095	1991593	AURA
74369064	2196818	AURA
74322660		AURAFLUX
75141345		AURAGEN
75977693	2202313	AURAGEN
75594235	2477031	AURAGEN POWER. ON THE GO.
74639340		AURAPHILE
75141344		AURAPOWER
75237652		AURAGEN OF POWER
74134961		AURASCOPE
74134960		AURASCOPE
74466053	2142944	AURASCOPE
74417408		AUTO SONICS
74410206		AURA SONICS
74349974		AURASOUND
74313418	2482562	AURA SOUND
75235513		AURA VIRTUAL SOUND
75235817		A V S
74679644	2072412	BASS SHAKER
74491123	1894891	CUSTOMWARE
74491122	1892461	CUSTOMWARE
75235512		DO MORE THAN LISTEN
75225341	2181910	EVA
75225280		FAR
75225289		FAS
75225288		FERRODISK
75291968		FORCE
75225287		FORCE
75225296		FORCE 10
75225297		FORCE 12
75225298		FORCE 15
75225286		FORCE 42
75225285		FORCE 52
75225284		FORCE 62
75229617		FORCE 150
75229616		FORCE 250
75229720		FORCE 340
75229718		FORCE 400Q
75225283		FORCE 426
75225282		FORCE 527
75229719		FORCE 560
75225281		FORCE 629
75225295		FORCE 639
74408244		HIGH GAP
74408232		HIGH STROKE
74472097		INTERACTOR
74425395	1920753	INTERACTOR
74132488	1663325	LINAEUM
74408446		LINEAR GAP
74408231		LINEAR FLUX
74408619		LINEAR MAG
74408211		LINEAR RING
75330407		LINE SOURCE
75291967		LINE SOURCE
74408243		LINEAR STROKE
74528276		MAGFORCE
75131644		MOBILE REFERENCE
75579640		MOBILE REFERENCE PLATINUM
75252086	2257621	MR
75252085	2170439	MR 1
75252089	2219543	MR 5.1
75252090	2188518	MR 6.1
75252087	2224713	MR 52
75252088	2170440	MR 62
75252091		MR 629
74385179		MUSICAL CHAIRS
74720723	2063972	NEO-RADIAL
75123841	2111403	NEO-RADIAL TECHNOLOGY
74706753	2067789	NEO-RADIAL TECHNOLOGY
74408671		NEO RING
75021447		NETFAX
74408448		NEO FLUX
74408206		NEO GAP
74408447		NEO MAG
74408208		NEO POWER
74408179		NEO STROKE
75021446		NETTALK
75033935	2030035	NEWCOM
75033934	2030034	NEW COM
74618797		NEWTALK
74706754	2144980	NRT
74408242		PILLOW SONICS
74394182		POWER TOWER
74408601		RADIAL FLUX
74408672		RADIAL GAP
74408207		RADIAL LINE
74408180		RADIAL MAG
74408445		RADIAL NEO
74408209		RADIAL POLE
74408205		RADIAL POWER
74408664		RADIAL RING
74408178		RADIAL STROKE
75579192	2654647	RPM
74528416		SOUNDPLAY
74408003		TALL GAP
74431065		TECHNOLOGIES OF THE 21ST CENTURY
74408210		THEATRE SONICS
75579641		THE ULTIMATE UPGRADE
74437049		THUNDERBOLT
74367568		21ST CENTURY TECHNOLOGIES
74388369		VIBRASONICS

3. Copyrights.

Any and all domestic and foreign copyright registrations, copyright applications or other copyright-related rights to current and future interests owned by Debtor or assigned to Debtor.

[Remainder of page intentionally left blank]

SCHEDULE 2

Patents and Patent Applications, Trademarks and Trademark Applications

and

Copyrights and Copyright Applications Licensed to the Debtor

None.

SCHEDULE 3

Patents and Patent Applications

Trademarks and Trademark Applications,

And Copyrights and Copyright Applications

Licensed By the Debtor

None.

SCHEDULE 4

Schedule of Exceptions

1. El Seguendo real property and facilities are subject to a security interest related to mortgage financing and a pending sale/leaseback transaction.

2. Note receivable for approximately $1,000,000 under the Alpha Ceramics purchase agreement has been assigned as collateral to the purchasers in such sale/leaseback transaction.

3. The Plaintiffs in Arthur Schwatz v. Aura Systems, Inc. received a Writ of Attachment to collect a portion of their judgment. On May 3, 2004, the Plaintiffs used this Writ to effect a levy against the Company's primary bank account and received approximately $191,689. On May 11, 2004, Plaintiffs returned those funds to the Company without relinquishing their rights under the Writ. On June 7, 2004, the Plaintiff and the Company entered an Agreed Judgment in this case with a 45 day delayed effective date.

SCHEDULE 5

Debtor Information

State of organization: Delaware

Address of
chief executive office: Aura Systems, Inc.

2335 Alaska Avenue

El Segundo, CA 90245

Address(es) where
books and records are kept: Same

Additional trade names: None

EX-4

AURA SYSTEMS, INC.

REGISTRATION RIGHTS AGREEMENT

(Intercreditor #2)

Dated as of December 16, 2004

Intercreditor #2

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of December 15, 2004, is made by and among AURA SYSTEMS, INC., a Delaware corporation (the "Company"), and THE INVESTORS LISTED ON THE SIGNATURE PAGE HEREOF (each of whom is herein called individually, a "Investor" and all of whom are herein called, collectively, the "Investors"), with reference to the following facts:

In connection with the Convertible Promissory Note dated as of the date hereof (the "Note") made by the Company in favor of the Investors, this Agreement is to be executed and delivered by the Investors and the Company.

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto further agree as follows:

1. Registration Rights. The Company covenants and agrees as follows:
0. Definitions. For purposes of this Section 1:
1. "Common Stock" means the Company's common stock, par value $.005 per share.
2. "Form S-3" means such form under the 1933 Act as in effect on the date hereof or any registration form under the 1933 Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.
3. "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof.
4. "1933 Act" means the Securities Act of 1933, as amended.
5. "1934 Act" means the Securities Exchange Act of 1934, as amended.
6. "register", "registered", and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such registration statement or document.
7. "Registrable Securities" means (i) the shares of Common Stock issuable upon conversion of the Series B Stock to be acquired by the Investors pursuant to the Note, (ii) the shares of Common Stock issuable upon exercise of the warrants to be acquired by the Investors by pursuant to the Note, (iii) any shares of Common Stock held by the Investors which were previously acquired by them; (iv) the shares of Common Stock issuable upon conversion of any Series A Stock held by the Investors which were previously acquired by them, (v) the shares of Common Stock issuable upon exercise of any warrants held by the Investors which were previously acquired by them, (vi) the shares of Common Stock issuable upon exercise of the Registration Warrants (as defined in Section 1.3(c)), and (vii) any other shares of stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respe ct to, or in exchange for, or in replacement of, the shares referenced in clauses (i) through (vii) above; provided that there shall be excluded any Registrable Securities sold by a person in a transaction in which that person's rights under this Section 1 are not assigned.
8. The number of shares of "Registrable Securities" outstanding shall be determined by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities.
9. "SEC" means the Securities and Exchange Commission.
10. "Series A Stock" means the Company's Series A Convertible Redeemable Preferred Stock, par value $.005 per share.
11. "Series B Stock" means the Company's Series B Cumulative Convertible Preferred Stock, par value $.005 per share.
12. Other Terms: Any other capitalized term not defined herein shall have the meaning set forth in the Note.
1. [Intentionally Omitted].
2. Agreed Registration.
1. Within one hundred twenty (120) days after the date of approval by the Company's shareholders of an increase in the number of authorized shares of Common Stock (the "Shareholder Approval Date"), the Company shall prepare and file with the SEC a registration statement on Form S-3 (or, if Form S-3 is not then available, on such form of registration statement that is then available to effect a registration of all Registrable Securities, subject to consent of the Investors holding at least a majority of the Registrable Securities) covering the registration of all of the Registrable Securities, other than the shares issuable upon exercise of the Registration Warrants. In the event that any Registration Warrants are issued, the Company shall promptly amend such registration statement to also include the shares issuable upon exercise of such Registration Warrants. The Company shall use best efforts to obtain the effectiveness of such registration statement as soon as possible thereafte r. The Company shall keep such registration statement effective at all times until the earlier of the date on which all the Registrable Securities (i) are sold by the Holders in an open market transaction and (ii) can be sold by the Holders (and any affiliate of the Holders with whom the Holders must aggregate their sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act.
2. If the Holders intend to distribute the Registrable Securities by means of an underwriting, they shall so advise the Company. The underwriter will be selected by a majority in interest (as determined by the number of Registrable Securities held) of the Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include such Holder's Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Holders) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 1.6(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Sect ion 1.3, if the underwriter advises the Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Holders shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, provided that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting.
3. If either (i) on the date one hundred twenty (120) days after the Shareholder Approval Date the registration statement described in Section 1.3(a) has not been filed or (ii) the Company fails to appropriately respond to any comments received from the SEC on such registration statement within forty-five (45) days after receipt (including the filing of an amendment to such registration statement if appropriate), then the Company, unless waived by an Investor, shall issue to each Investor a warrant in the form attached hereto as Exhibit A (each, a "Registration Warrant" and, collectively, the "Registration Warrants") to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note, excluding (x) such Registrable Securities which have been sold by that Investor in an open market transaction, or (y) can be sold by that Investor (and any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act. The exercise price of each such Registration Warrant shall be $.02 per share, subject to adjustment as set forth in the Registration Warrant.
4. If at the end of each subsequent thirty (30) day period thereafter either (i) the Company still has not filed the registration statement described in Section 1.3(a) or (ii) the Company still has not appropriately responded to any comments received from the SEC on such registration statement (including the filing of an amendment to such registration statement if appropriate), then the Company, unless waived by an Investor, shall issue to each Investor an additional Registration Warrant to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note, excluding (x) such Registrable Securities which have been sold by that Investor in an open market transaction, or (y) can be sold by that Investor (and any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) in any three-month period without volume limitation and without reg istration in compliance with Rule 144 under the 1933 Act.
5. If (i) the registration statement described in Section 1.3(a) becomes effective but at any time thereafter is no longer effective (or is deemed no longer effective as a result of any suspension of use under the circumstances described in Section 1.6(f)) and (ii) such lack of effectiveness continues for a forty-five (45) day period, then the Company, unless waived by an Investor, shall issue to each Investor a Registration Warrant to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note, excluding (x) such Registrable Securities which have been sold by that Investor in an open market transaction, or (y) can be sold by that Investor (and any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act ..
6. If at the end of each subsequent thirty (30) day period thereafter, the registration statement described in Section 1.3(a) still is no longer effective (or is deemed no longer effective as a result of any suspension of use under the circumstances described in Section 1.6(f)), then the Company, unless waived by an Investor, shall issue to each Investor an additional Registration Warrant to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note, excluding (x) such Registrable Securities which have been sold by that Investor in an open market transaction, or (y) can be sold by that Investor (and any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act..
7. Notwithstanding the foregoing, the maximum amount of Registration Warrants issuable to any Investor under Sections 1(d) through 1(f) shall be Registration Warrants to acquire the number of shares of Common Stock equal to (i) 12.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note.
8. The Company shall execute such other and further certificates, instruments and other documents as may be reasonably requested by the Investors or reasonably necessary or proper to implement, complete and perfect the Investors' rights under this Section 1.3 and, upon effectiveness of a registration statement with respect to the Registrable Securities, to freely trade the Registrable Securities without limitation or restriction imposed or created by the Company or securities law.
9. The terms and covenants set forth in this Section 1.3 shall terminate as to each Holder and be of no further force and effect on the earlier of the date on which all the Registrable Securities beneficially owned by that Holder (i) are registered pursuant to this Section 1.3 and sold by that Holder in an open market transaction or (ii) can be sold by that Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act.
3. Company Registration.
1. If (but without any obligation to do so) the Company proposes to register any of its stock (including a registration effected by the Company for stockholders other than the Holders) or other securities under the 1933 Act in connection with the public offering of such securities on any form which also would permit registration of the Registrable Securities, the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within thirty (30) days after such notice by the Company, the Company shall, subject to the provisions of Section 1.4(c), cause to be registered under the 1933 Act all of the Registrable Securities that each such Holder has requested to be registered.
2. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.4 prior to the effectiveness of such registration, whether or not any Holder shall have elected to include securities in such registration. The expenses of such withdrawn registration shall be borne by the Company in accordance with Section 1.8 hereof.
3. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under this Section 1.4 to include any requesting Holder's securities in such underwriting, unless such Holder accepts the terms of the underwriting as agreed between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters) and enters into an underwriting agreement in customary form with the underwriter or underwriters selected by the Company, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested to be included in such offering by the Company, the Holders and other security holders to whom registration rights have been granted exceeds the amount of securities that the underwriters determine in their sole discretion is compatible w ith the success of the offering, then the Company shall be required to include in the offering only that number of securities (including Registrable Securities) that the underwriters determine in their sole discretion will not jeopardize the success of the offering (the Registrable Securities so included to be apportioned pro rata among the selling Holders according to the total amount of Registrable Securities requested to be included therein by each selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders); provided, that the amount of Registrable Securities requested by the Holders to be included in such offering pursuant to this Section 1.4 and all other securities requested by other holders to be included in such offering pursuant to other "piggyback" registration rights shall be reduced first (the Registrable Securities and other securities so reduced to be apportioned pro rata among the selling Holders and other holders according to the total amount of Registr able Securities and other securities requested to be included therein by each selling Holder and other holder) before any reduction of any (i) securities requested to be included in such offering by any holders exercising "demand" registration rights or (ii) any securities sold by the Company to be included in such offering. For purposes of such apportionment among Holders, for any selling stockholder that is a Holder of Registrable Securities and that is a partnership or corporation, the partners, retired partners and stockholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling Holder", and any pro rata reduction with respect to such "selling Holder" shall be based on the aggregate amount of Registrable Securities requested to be included in such offering by all such related entities and individuals.
4. Form S-3 Registration. If the Company shall receive from one or more Holders a request or requests that the Company effect a registration on Form S-3 and any related blue sky or similar qualification or compliance with respect to at least 25% (or a lesser percentage if the requirements of Section 1.5(b)(i) are met) of the Registrable Securities owned by such Holder or Holders, the Company shall:
1. promptly give notice of the proposed registration, and any related blue sky or similar qualification or compliance, to all other Holders; and
2. cause, as soon as practicable, such Registrable Securities to be registered for offering and sale on Form S-3 and cause such Registrable Securities to be qualified in such jurisdictions as such Holders may reasonable request, together with all or such portion of the Registrable Securities of any other Holders joining in such request as are specified in a request given within fifteen (15) days after receipt of such notice from the Company; provided that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.5:
1. if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $500,000;
2. if the Company has, within the twelve month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 1.5;
3. if the Company shall furnish to the Holders a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than sixty (60) days after receipt of the request of the Holder or Holders under this Section 1.5; provided that the Company shall not utilize this right more than once in any twelve (12) month period; provided, further, that the Company shall not register shares for its own account during such sixty (60) day period, but such prohibition shall not apply to the registration of Company shares in connection with (x) a merger or (y) registration of shares relating to a stock option, stock purchase or similar plan; or
4. in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance.
3. Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders.
5. Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:
1. except as otherwise provided in Section 1.3, prepare and file with the SEC a registration statement with respect to such Registrable Securities and use best efforts to cause such registration statement to become effective, and keep such registration statement effective for a period of up to two hundred seventy (270) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided that (i) such two hundred seventy (270) day period shall be extended for a period of time equal to (A) the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company and (B) the period of any suspension of use of such registration statement under the circumstances described in Section 1.6(f); and (ii) in the case of any registration of Registrable Securities on Form S-3 (or any other Form, to the extent permitted by law) that are intended to be offered on a continuous or delayed basis, such two hundred seventy (270) day period shall be extended, if necessary, to keep the Registration Statement effective until all such Registrable Securities are sold, except to the extent that the Holders (and any affiliate of the Holders with whom the Holders must aggregate their sales under Rule 144) of such Registrable Securities may sell those Registrable Securities in any three-month period without regard to the volume limitation and without registration in compliance with Rule 144 under the 1933 Act;
2. prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the 1933 Act with respect to the disposition of all securities covered by such registration statement during the period of time such registration statement remains effective;
3. furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request to facilitate the disposition of Registrable Securities owned by them;
4. use best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions;
5. in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering;
6. during the period of time such registration statement remains effective, immediately notify each Holder of Registrable Securities covered by such registration statement in writing at any time when (i) a prospectus relating thereto is required to be delivered under the 1933 Act or (ii) the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and in the case of clause (ii) above, the Holder shall suspend the use of the prospectus until its receipt of the written notice referred to in the last sentence of this Section 1.6(f). Notwithstanding the provisions of this Section 1.6, the Company may, during the period a registration statement is required to remain effective hereunder, suspend the use of the prospec tus for a period not to exceed sixty (60) days (whether or not consecutive) in any 12-month period if the Board of Directors of the Company determines in good faith that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and similar events, it is in the best interests of the Company to suspend such use, and prior to or contemporaneously with suspending such use the Company provides the Holders of Registrable Securities with written notice of such suspension (which notice need not specify the nature of the event giving rise to such suspension), and the Holder shall suspend the use of the prospectus until its receipt of the written notice referred to in the last sentence of this Section 1.6(f). At the end of any suspension period referred to in the first or second sentence of this Section 1.6(f), the Company shall immediately provide the Holders with written notic e of the termination of such suspension.
7. cause all such Registrable Securities registered hereunder to be listed on each securities exchange on which securities of the same class issued by the Company are then listed;
8. provide a transfer agent and registrar for all Registrable Securities registered hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and
9. furnish, at the request of any Holder, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus include d therein) and with respect to events subsequent to the date of the financial statements, as are customarily covered in accountants' letters delivered to the underwriters in underwritten public offerings of securities addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities.
6. Information from Holder. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding such Holder, the Registrable Securities held by such Holder, and the intended method of disposition of such securities as shall be required to effect the registration of such Registrable Securities.
7. Expenses of Registration. All expenses incurred in connection with registrations, filings or qualifications pursuant to this Section 1, including without limitation all registration, filing and qualification fees, printing fees and expenses, accounting fees and expenses, fees and disbursements of counsel for the Company and the fees and disbursements of one counsel for the selling Holders selected by the Holders, shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Sections 1.3 and 1.5 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based on the number of Registrable Securities that were requested to be included in the withdrawn registration); provided that, if at the time of such withdrawal, the Holders shall have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and shall have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Sections 1.3 and 1.5. Anything herein to the contrary notwithstanding, all underwriting discounts and commissions incurred in connection with a sale of Registrable Securities shall be borne and paid by the Holder thereof, and the Company shall have no responsibility therefor.
8. Indemnification. If any Registrable Securities are included in a registration statement under this Section 1:
1. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners or officers, directors and stockholders of such Holder, legal counsel and accountants for such Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the 1933 Act, the 1934 Act or any other federal or state securities law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements th ereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law; and the Company will reimburse such Holder, underwriter or controlling person for any legal or other expenses incurred, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided that the indemnity agreement in this Section 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent tha t it arises out of or is based on a Violation that occurs in reliance on and in conformity with written information furnished expressly for use in connection with such registration by such Holder, underwriter or controlling person.
2. To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who shall have signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities to which any of the foregoing persons may become subject, under the 1933 Act, the 1934 Act or any other federal or state securities law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance on and in conformity with written information furnished by such Holder expressly for use in connection with such regi stration; and each such Holder will reimburse any person intended to be indemnified pursuant to this Section 1.9(b), for any legal or other expenses reasonably incurred, as incurred, by such person in connection with investigating or defending any such loss, claim, damage, liability or action; provided that the indemnity agreement in this Section 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld or delayed); and provided further that in no event shall any indemnity by such Holder under this Section 1.9(b), when aggregated with amounts contributed, if any, pursuant to Section 1.9(d), exceed the net proceeds from the sale of Registrable Securities hereunder received by such Holder.
3. Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent that the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to notify the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to notify the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9.
4. If the indemnification provided in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that shall have resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations; provided that in no event shall any contribution by a Holder under this Section 1.9(d), when aggregate with amounts paid, if any, pursuant to Section 1.9(b), exceed the net proceeds from the sale of Registrable Securities hereu nder received by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.
5. Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.
6. The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise.
9. Reports under 1934 Act. With a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration statement (including, without limitation, Form S-3), the Company agrees to:
1. make and keep public information available, as those terms are used in SEC Rule 144, at all times;
2. take such action as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities;
3. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; and
4. furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith on request, (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the 1933 Act and the 1934 Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration or pursuant to such form.
10. Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such Registrable Securities that (i) is a subsidiary, parent, current or former partner, current or former limited partner, current or former member, current or former manager or stockholder of a Holder, (ii) is an entity controlling, controlled by or under common control with a Holder, including without limitation a corporation or limited liability company that is a direct or indirect parent or subsidiary of the Holder, (iii) is a transferee or assignee of a Holder and the number of shares representing or underlying the Registrable Securities (whether in the form of shares, warrants to purchase shares, or a combination of the foregoing) transferred or assigned constitute at least 500,000 shares of Registrable Securities held by such Holder (as adjusted for stock split, combinations, dividends and the like); provided that: (a) the Company is, within a reasonable time after such transfer, notified of the name and address of such transferee or assignee and the Registrable Securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement; (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act; and (d) such assignment is not made pursuant to a registration statement effected pursuant to this Agreement.
11. Duplicative Registration Rights. The rights of the Investors under Section 1.4 or Section 1.5 shall not apply to the extent that Registrable Securities then held by the Investors are already covered by an effective registration statement under Section 1.3 or any other Section of this Agreement.
12. Termination of Registration Rights. No Holder shall be entitled to exercise any right provided in this Section 1 with respect to a Registrable Security (i) after the date on which that Registrable Security has been sold under a registration statement filed in accordance with this Agreement or (ii) if all Registrable Securities held by such Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act.
2. Covenants.
0. Reserve for Exercise Shares. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock such number of shares (the "Exercise Shares") as shall be sufficient to enable it to comply with its exercise obligations under the Registration Warrants. If at any time the number of Exercise Shares shall not be sufficient to effect the exercise of the Registration Warrants, the Company will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number as will be sufficient for such purposes. The parties acknowledge that the Company currently does not have any authorized but unissued shares of Common Stock available for issuance and the Company hereby agrees to use its best efforts to take action to call a shareholders meeting and increase its authorized but unissued Common Stock as soon as practicable. The Company will obtain authorization, consent, approv al or other action by, or make any filing with, any administrative body that may be required under applicable state securities laws in connection with the issuance of Exercise Shares.
1. Confidential Information. The Company shall provide to each Holder not less than ten days' prior written notice of its intention to deliver to such Holder confidential or non-public information relating to the Company and shall mark such information as "confidential" or "non-public." If a Holder notifies Company that it does not desire to receive such confidential or non-public information, then the Company shall not deliver such information to such Holder. Whether or not a Holder has so notified the Company, such Holder may, in its sole discretion, decline to receive from the Company such confidential or non-public information, and as a result thereof shall not be deemed to have received or have any knowledge of such confidential or non-public information; provided that it has not received the same or promptly returns the same upon receipt by such Holder.
3. Miscellaneous.
0. Successors and Assigns. Except as otherwise provided herein, this Agreement shall inure to the benefit of and bind the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer on any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
1. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Washington, without giving effect to its conflicts of law principles. All disputes between the parties hereto arising out of or in connection with this Agreement or the Registrable Securities, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above-referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non conveniens. Notwithstanding the foregoing, any party obtaining an order or judgment in any of the above-referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.
2. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
3. Headings. The headings of sections and subsections in this Agreement are used for convenience of reference only and are not to be considered in construing or interpreting this Agreement.
4. Notices. Any request, consent, notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed duly given and received when delivered personally or transmitted by facsimile, one business day after being deposited for next-day delivery with a nationally recognized overnight delivery service, or three business days after being deposited as first class mail with the United States Postal Service, all charges or postage prepaid, and properly addressed to the party to receive the same at the address for such party indicated on the signature page hereof or at such other address as such party may designate by advance written notice to the other parties.
5. Expenses. If any action at law or in equity is necessary to enforce or interpret any of the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and disbursements in addition to any other relief to which such party may be entitled. In addition, the Company shall pay the reasonable attorneys' fees, costs and disbursements of the Investors in enforcing any terms of this Agreement, whether or not any action at law or in equity is brought.
6. Entire Agreement: Amendments and Waivers. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subject matter hereof. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the consent of the Company and the holders of more than 66-2/3% of the Registrable Securities; provided that no amendment shall be effective against any holder or holders of Registrable Securities that would be affected adversely and affected differently from the Holders generally by such amendment, without the consent of such holder or holders. Any amendment or waiver effected in accordance with this Section 3.7 shall be binding on the Company, each holder of any Registrable Securities and each future holder of all such Registrable Securities.
7. Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

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IN WITNESS WHEREOF, this Registration Rights Agreement has been duly executed by or on behalf of the parties hereto as of the date first above written.

"Company"

AURA SYSTEMS, INC.

By:

Name:

Title:

2335 Alaska Avenue

El Segundo, CA 90245

Attn: President

Fax: (310) 643-8719

"Investors"

KOYAH MICROCAP PARTNERS MASTER

FUND, L.P.

By: Koyah Ventures LLC, its general partner

By:

Name:

Title:

c/o ICM Asset Management, Inc.
601 West Main Avenue, Suite 600
Spokane, WA 99201
Attn: Robert Law

Fax: (509) 444-4500

[Signature page to Registration Rights Agreement (Intercreditor #2)]

I:\Spodocs\28601\00024\agree\00281072.DOC:lg

EXHIBIT A

Form of Registration Warrant

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

Warrant To Purchase Common Stock

Of

Aura Systems, Inc.

______________, ______

No. W-__

This certifies that __________________________ (the "Holder") is entitled, subject to the terms and conditions of this Warrant, to purchase from AURA SYSTEMS, INC., a Delaware corporation (the "Company"), all or any part of an aggregate of ______________ shares of the Company's authorized and unissued Common Stock, par value $.005 (the "Warrant Stock"), at the Warrant Price (as defined herein), upon surrender of this Warrant at the principal offices of the Company, together with a duly executed subscription form in the form attached hereto as Exhibit 1 and simultaneous payment of the Warrant Price for each share of Warrant Stock so purchased in lawful money of the United States, unless exercised in accordance with the provisions of Section 2.5 of this Warrant. The Holder may exercise the Warrant at any time after the date of this Warrant and prior to the seventh anniversary of the date hereof (the "Expiration Date").

This Warrant is issued pursuant to the Registration Rights Agreement dated as of December 15, 2004 (the "Registration Rights Agreement"), by and among the Company and the Investors named therein.

1. Definitions. The following definitions shall apply for purposes of this Warrant:

1.1 "Acquisition" means any consolidation, merger or reorganization of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent of the Company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent of the Company's voting power is transferred, excluding any consolidation, merger or reorganization effected exclusively to change the domicile of the Company.

1.2 "Asset Transfer" means a sale, lease or other disposition of all or substantially all of the assets of the Company.

1.3 "Company" means the "Company" as defined above and includes any corporation or other entity that succeeds to or assumes the obligations of the Company under this Warrant.

1.4 "Common Stock" means the Common Stock, par value $.005, of the Company.

1.5 "Fair Market Value" of a share of Warrant Stock means (i) if the Common Stock is traded on a securities exchange, the average of the closing price on each trading day over the ten consecutive trading day period ending three trading days before the day the Fair Market Value of the securities is being determined, (ii) if the Common Stock is actively traded over-the counter, the average of the closing bid and asked prices quoted on the NASDAQ system (or similar system) on each trading day over the five consecutive trading day period ending one trading day before the day the Fair Market Value of the securities is being determined, or (iii) if at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, then the Fair Market Value determined by the Company's Board of Directors in good faith.

1.6 "Holder" means the "Holder" as defined above and includes any transferee who shall at the time be the registered holder of this Warrant.

1.7 "Warrant" means this Warrant and any warrant(s) delivered in substitution or exchange therefor, as provided herein.

1.8 "Warrant Price" means $.02 per share of Warrant Stock. The Warrant Price is subject to adjustment as provided herein.

1.9 "Warrant Stock" means the Common Stock. The number and character of shares of Warrant Stock are subject to adjustment as provided herein and the term "Warrant Stock" shall include stock and other securities and property at any time receivable or issuable upon exercise of this Warrant in accordance with its terms.

2. Exercise.

2.1 Method of Exercise. Subject to the terms and conditions of this Warrant, the Holder may exercise the purchase rights represented by this Warrant in whole or in part, at any time or from time to time, on or after the date hereof and before the Expiration Date, by surrendering this Warrant at the principal offices of the Company, with the subscription form attached hereto duly executed by the Holder, and payment of an amount equal to the product obtained by multiplying (i) the number of shares of Warrant Stock so purchased by (ii) the Warrant Price, as specified in Section 2.2 below.

2.2 Form of Payment. Except as provided in Section 2.5, payment may be made by (i) a check payable to the Company's order, (ii) wire transfer of funds to the Company, (iii) cancellation of indebtedness of the Company to the Holder, or (iv) any combination of the foregoing.

2.3 Partial Exercise. Upon a partial exercise of this Warrant, this Warrant shall be surrendered by the Holder and replaced with a new Warrant or Warrants of like tenor for the balance of the shares of Warrant Stock purchasable under the Warrant surrendered upon such purchase. The Warrant or Warrants will be delivered to the Holder thereof within a reasonable time.

2.4 No Fractional Shares. No fractional shares may be issued upon any exercise of this Warrant. If upon any exercise of this Warrant a fraction of a share results, such fraction shall be rounded upwards or downwards to the nearest whole number.

2.5 Net Exercise Election. The Holder may elect to convert all or a portion of this Warrant, without the payment by the Holder of any additional consideration, by the surrender of this Warrant or such portion to the Company, with the net exercise election selected in the subscription form attached hereto duly executed by the Holder, into the number of shares of Warrant Stock that is obtained under the following formula:

X = Y (A-B)

A

where X = the number of shares of Warrant Stock to be issued to the Holder pursuant to this Section 2.5.

Y = the number of shares of Warrant Stock purchasable under this Warrant, or if only a portion of the Warrant is being exercised, the number of shares of Warrant Stock represented by the portion of the Warrant being exercised.

A = the Fair Market Value of one share of Warrant Stock at the time the net exercise election is made pursuant to this Section 2.5.

B = the Warrant Price.

2.6 Condition of Exercise. As a condition to any exercise of this Warrant, the Holder shall represent and warrant as to its status as an "accredited investor" under the Securities Act of 1933, as amended (the "Act"), by delivering the subscription form attached hereto (together with the appendix attached thereto).

3. Issuance of Stock. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Warrant Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As soon as practicable, but in any event no later than three days after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of whole shares of Warrant Stock issuable upon such exercise. The Company covenants and agrees that all shares of Warrant Stock that are issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder, free of all taxes, liens and charges with resp ect to the issue thereof and free and clear of any restrictions on transfer (other than under the Act and state securities laws).

1. Adjustment Provisions. The number and character of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities or property at the time receivable or issuable upon exercise of this Warrant) and the Warrant Price for the Common Stock are subject to adjustment upon the occurrence of the following events between the date this Warrant is issued and the date it is exercised:
0. Adjustment for Stock Splits, Stock Dividends, Recapitalizations, etc. The Warrant Price of this Warrant and the number of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall each be appropriately and proportionally adjusted to reflect any stock dividend, stock split, reverse stock split, combination of shares, reclassification, recapitalization or other similar event affecting the number of outstanding shares of Warrant Stock (or such other stock or securities).
1. Adjustment for Other Dividends and Distributions. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution payable with respect to the Warrant Stock that is payable in (a) securities of the Company (other than issuances with respect to which adjustment is made under Section 4.1), or (b) assets (other than cash dividends paid or payable solely out of retained earnings), then, and in each such case, the Holder, upon exercise of this Warrant at any time after the consummation, effective date or record date of such event, shall receive, in addition to the shares of Warrant Stock issuable upon such exercise prior to such date, the securities or such other assets of the Company to which the Holder would have been entitled upon such date if the Holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in thi s Warrant).
2. Adjustment for Reorganization, Consolidation, Merger. In case of any reorganization of the Company (or of any other corporation or entity, the stock or other securities of which are at the time receivable on the exercise of this Warrant), after the date of this Warrant, or in case, after such date, the Company (or any such corporation or entity) shall consolidate with or merge into another corporation or entity or convey all or substantially all of its assets to another corporation or entity, then, and in each such case, the Holder, upon the exercise of this Warrant (as provided in Section 2), at any time after the consummation of such reorganization, consolidation, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of this Warrant prior to such consummation, the stock or other securities or property to which the Holder would have been entitled upon the consummation of such reorgan ization, consolidation, merger or conveyance if the Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in this Warrant, and the successor or purchasing corporation or entity in such reorganization, consolidation, merger or conveyance (if other than the Company) shall duly execute and deliver to the Holder a supplement hereto acknowledging such corporation's or entity's obligations under this Warrant; and in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after the consummation of such reorganization, consolidation, merger or conveyance.
3. Notice of Certain Events and Adjustments. The Company shall give thirty days prior written notice of the record date fixed for any Acquisition, Asset Transfer or event referred to in Section 4.2 or 4.3. The Company shall promptly give written notice of each adjustment or readjustment of the Warrant Price or the number of shares of Warrant Stock or other securities issuable upon exercise of this Warrant. The notice shall describe the adjustment or readjustment and show in reasonable detail the facts on which the adjustment or readjustment is based.
4. No Change Necessary. The form of this Warrant need not be changed because of any adjustment in the Warrant Price or in the number of shares of Warrant Stock issuable upon its exercise.
2. No Rights or Liabilities as Stockholder. This Warrant does not by itself entitle the Holder to any voting rights or other rights as a stockholder of the Company. In the absence of affirmative action by the Holder to purchase Warrant Stock by exercise of this Warrant, no provisions of this Warrant, and no enumeration herein of the rights or privileges of the Holder, shall cause the Holder to be a stockholder of the Company for any purpose.
3. Attorneys' Fees. The Company shall pay the reasonable attorneys' fees, costs and disbursements of the Holder in enforcing any terms of this Warrant, whether or not any action at law or in equity is brought.
4. Transfer. This Warrant may be transferred or assigned by the Holder hereof in whole or in part, if, on the Company's reasonable request, the Holder provides an opinion of counsel reasonably satisfactory to the Company that such transfer does not require registration under the Act and the applicable state securities law, except that this Warrant may be transferred by a Holder which is a partnership or limited liability company to a partner, former partner, member, former member or other affiliate of such partnership or limited liability company, as the case may be, if (a) the transferee agrees in writing to be subject to the terms of this Warrant and (b) the Holder delivers notice of such transfer to the Company. The rights and obligations of the Company and the Holder under this Warrant shall be binding upon and inure to the benefit of their respective permitted successors, assigns, heirs, administrators and transferees.
5. Loss or Mutilation. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership and the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to it, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver in lieu thereof a new Warrant of like tenor.
6. Reservation of Warrant Stock. If at any time the number of authorized but unissued shares of the Warrant Stock shall not be sufficient to effect the exercise of this Warrant, the Company shall take all such corporate action as may be necessary to increase its authorized but unissued shares of the Warrant Stock to such number of shares of the Warrant Stock as shall be sufficient for such purpose. The parties acknowledge that the Company currently does not have any shares of the Warrant Stock available for issuance and the Company hereby agrees to use its best efforts to take action to call a stockholder meeting and increase its authorized but unissued Warrant Stock as soon as practicable.
7. Governing Law. This Warrant shall be governed by and construed and interpreted in accordance with the laws of the State of Washington, without giving effect to its conflicts of law principles. All disputes between the parties hereto arising out of or in connection with this Warrant or the Warrant Stock, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above-referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non conveniens. Notwithstanding the foregoing, any party obtaining an order or judgment in any of the above-referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.
8. Headings. The headings and captions used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant. All references in this Warrant to sections and exhibits shall, unless otherwise provided, refer to sections hereof and exhibits attached hereto, all of which exhibits are incorporated herein by this reference.
9. Notices. Any request, consent, notice or other communication required or permitted under this Warrant shall be in writing and shall be deemed duly given and received when delivered personally or transmitted by facsimile, one business day after being deposited for next-day delivery with a nationally recognized overnight delivery service, or three business days after being deposited as first class mail with the United States Postal Service, all charges or postage prepaid, and properly addressed to the party to receive the same at the address for such party indicated in the Registration Rights Agreement or at such other address as such party may have designated by advance written notice to the other party.
10. Amendment; Waiver. Any term of this Warrant may be amended and the observance of any term of this Warrant may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder in the case of an amendment and only with the written consent of the waiving party in the case of a waiver.
11. Severability. If one or more provisions of this Warrant are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Warrant and the balance of the Warrant shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms.
12. Terms Binding. By acceptance of this Warrant, the Holder accepts and agrees to be bound by all the terms and conditions of this Warrant.
13. Valid Issuance; Taxes. All shares of Warrant Stock issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable, and the Company shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof. The Company shall not be required to pay any transfer tax or other similar charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Warrant Stock in any name other than that of the Holder of this Warrant.
14. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of Warrant Stock issuable upon the exercise of this Warrant above the amount payable therefor upon such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Warrant Stock upon exercise of this Warrant .

[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the date and year first set forth above.

AURA SYSTEMS, INC.

By:

Name: ______________________________

Title: _______________________________

[Signature Page to Warrant]

Exhibit 1

FORM OF SUBSCRIPTION

(To be signed only upon exercise of Warrant)

To: Aura Systems, Inc.

(1) Check the box that applies and the provide the necessary information:

o Cash Payment Election. The undersigned Holder hereby elects to purchase shares of Common Stock of Aura Systems, Inc. (the "Warrant Stock"), pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full.

o Net Exercise Election. The undersigned Holder elects to convert the Warrant into shares of Warrant Stock by net exercise election pursuant to Section 2.5 of the Warrant. This conversion is exercised with respect to __________ shares of Common Stock of Aura Systems, Inc. (the "Warrant Stock") covered by the Warrant.

(2) In exercising the Warrant, the undersigned Holder hereby makes the representations and warranties set forth on Appendix A hereto as of the date hereof.

(3) Please issue a certificate or certificates representing such shares of Warrant Stock in the name or names specified below:

(Name) (Name)

(Signature) (Signature)

(Address) (Address)

(City, State, Zip Code) (City, State, Zip Code)

(Federal Tax Identification Number) (Federal Tax Identification Number)

(Date) (Date)

Appendix A

INVESTMENT REPRESENTATION

The undersigned, _____________________ (the "Holder"), intends to acquire shares of Common Stock (the "Common Stock") of Aura Systems, Inc. (the "Company") from the Company pursuant to the exercise or conversion of a Warrant to purchase Common Stock held by the Holder. The Common Stock will be issued to the Holder in a transaction not involving a public offering and pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws. In connection with such purchase and in order to comply with the exemptions from registration relied upon by the Company, the Holder represents, warrants and agrees as follows:

(a) The Holder is acquiring the Common Stock for its own account, to hold for investment, and the Holder shall not make any sale, transfer or other disposition of the Common Stock in violation of the Securities Act or the General Rules and Regulations promulgated thereunder by the Securities and Exchange Commission or in violation of any applicable state securities law. The Holder is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act.

(b) The Holder has been advised that the Common Stock has not been registered under the Securities Act or state securities laws on the ground that this transaction is exempt from registration, and that reliance by the Company on such exemptions is predicated in part on the Holder's representations set forth herein.

(c) The Holder has been informed that under the Securities Act, the Common Stock must be held indefinitely unless it is subsequently registered under the Securities Act or unless an exemption from such registration (such as Rule 144) is available with respect to any proposed transfer or disposition by the Holder of the Common Stock. The Holder further agrees that the Company may refuse to permit the Holder to sell, transfer or dispose of the Common Stock (except as permitted under Rule 144) unless there is in effect a registration statement under the Securities Act and any applicable state securities laws covering such transfer, or unless the Holder furnishes an opinion of counsel reasonably satisfactory to counsel for the Company to the effect that such registration is not required.

The Holder also understands and agrees that there will be placed on the certificate(s) for the Common Stock or any substitutions therefor, a legend stating in substance:

"The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws. These shares have been acquired for investment purposes and may not be sold or otherwise transferred in the absence of an effective registration statement for these shares under the Securities Act and applicable state securities laws or an opinion of counsel satisfactory to the Company that registration is not required and that an applicable exemption is available."

I:\Spodocs\28601\00024\agree\00281072.DOC:lg

EX-5

JOINDER AGREEMENT

THIS JOINDER AGREEMENT(this "Agreement") is made and entered into as of the 16th day of December, 2004, by and among KOYAH LEVERAGE PARTNERS, L.P., a Delaware limited partnership ("KLP"), KOYAH PARTNERS, L.P., a Delaware limited partnership ("KP") (KLP and KP are sometimes collectively referred to as "Koyah"), and KOYAH MICROCAP PARTNERS MASTER FUND, L.P., a Cayman Islands limited partnership ("Microcap").

WITNESSETH:

WHEREAS, in connection with certain loans made to Aura Systems, Inc., a Delaware corporation (the "Company"), Koyah, Edgar Appleby, an individual ("Appleby"), Prudent Bear Fund, Inc., a Maryland corporation ("Prudent Bear"), and the Company entered into an Intercreditor Agreement dated as of January 19, 2004 (as supplemented or amended, the "Intercreditor Agreement");

WHEREAS, in connection with certain loans made to the Company, Raven Partners, L.P., a Delaware limited partnership ("Raven"), and Koyah Ventures LLC, a Delaware limited liability company ("Ventures"), were added as parties to the Intercreditor Agreement pursuant to a Joinder Agreement dated as of June 14, 2004;

WHEREAS, in connection with the Amendment and Conversion Agreement dated as of August 19, 2004, (i) Appleby and Prudent Bear converted all of their loans into equity and ceased to be parties to the Intercreditor Agreement and (ii) KLP, KP, Raven and Ventures converted part of their loans into equity and remained parties to the Intercreditor Agreement;

WHEREAS, capitalized terms used herein but not otherwise defined herein shall have the meaning assigned to them in the Intercreditor Agreement;

WHEREAS, in connection with the Koyah Loans, the Company and Koyah entered into the Koyah Transaction Documents;

WHEREAS, in connection with the Raven Loans, the Company and Raven entered into the Raven Transaction Documents;

WHEREAS, in connection with the Ventures Loans, the Company and Ventures entered into the Ventures Transaction Documents;

WHEREAS, (i) KLP and KP were granted senior first-priority security interests in the Collateral pursuant to their respective Transaction Documents and (ii) Raven and Ventures were subsequently granted junior, second-priority security interests in the Collateral pursuant to their respective Transaction Documents.

WHEREAS, pursuant to the Intercreditor Agreement, Koyah, Raven and Ventures among other things:

1. agreed the priority of the security interests in the Collateral granted to Koyah, Raven and Ventures as well as any other New Lender pursuant to their respective Transaction Documents would be co-equal;
2. agreed to share the Collateral on a pooled basis, to the extent of the amount of the Credit Obligations, for the ratable benefit of Koyah, Raven and Ventures as well as any other New Lender in accordance with their pro rata share of the Credit Obligations, on the terms and conditions set forth therein;
3. appointed KLP as Collateral Agent to hold and administer the Koyah Transaction Documents, the Raven Transaction Documents and the Ventures Transaction Documents as well as the Transaction Documents of any other New Lender, and the Collateral for their ratable benefit, on the terms and conditions set forth therein;
4. allocated, as between themselves, their relative rights in respect of the Collateral and agreed between themselves on certain other arrangements in connection with the Koyah Loans, the Raven Loans and the Ventures Loans as well as the Loans of any other New Lender, on the terms and conditions set forth therein; and
5. agreed that in the event the Company needed additional funding above and beyond the Koyah Loans, the Raven Loans and the Ventures Loans, additional individuals or entities making loans to the Company could join in the Intercreditor Agreement and be added as additional New Lenders thereunder, on the terms and conditions set forth therein;

WHEREAS, in connection with optional advances that may be made by Microcap to the Company, (i) the Company and Microcap are entering into an Agreement dated as of the date hereof (the "Microcap Agreement"), (ii) the Company is executing in favor of Microcap a Convertible Promissory Note dated as of the date hereof in the maximum principal amount of $220,000 (the "Microcap Note"), (iii) the Company is executing in favor of Microcap a Security Agreement dated as of the date hereof granting Microcap a junior, third-priority security interest in certain personal property collateral (the "Microcap Security Agreement") and (iv) the Company is executing in favor of Microcap a Stock Pledge Agreement dated as of the date hereof granting Microcap a junior, third-priority security interest in certain stock collateral (the "Microcap Stock Pledge Agreement") (the Microcap Agreement, the Microcap Note, the Microcap Security Agreement and the Microcap Stock Pledge Agreement are sometime s collectively referred to as the "Microcap Transaction Documents");

WHEREAS, Microcap wishes to join in the Intercreditor Agreement and be added as an additional New Lender thereunder, and Koyah, as the Majority In Interest under the Intercreditor Agreement, is willing to consent to Microcap joining in the Intercreditor Agreement and being added as an additional New Lender thereunder, on the terms and conditions set forth therein and herein.

NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in accordance with the terms of the Intercreditor Agreement:

1. Approval of the Majority In Interest.

Pursuant to Section 6 of the Intercreditor Agreement, Koyah, as the Majority In Interest under the Intercreditor Agreement, hereby approves:

1. Microcap as an additional New Lender under the Intercreditor Agreement;
2. The loans to be made by Microcap to the Company (the "Microcap Loans"), in a principal amount not to exceed $450,000 or such greater amount as may be approved by KLP and KP pursuant to Section 4(g) of the Intercreditor Agreement; and
3. The Microcap Transaction Documents in the forms provided to Koyah and the form and substance thereof.
2. Joinder Agreements.

Pursuant to Section 6 of the Intercreditor Agreement and subject to satisfaction of any conditions precedent to the effectiveness of this Agreement, Koyah, as the Majority In Interest under the Intercreditor Agreement, and Microcap, as an additional New Lender under the Intercreditor Agreement, hereby agree:

1. Microcap joins in and shall be an additional New Lender under the Intercreditor Agreement, with all of the rights and obligations of a New Lender thereunder and with all references in the Intercreditor Agreement to a New Lender also referring to Microcap, and Microcap shall be bound by all of the terms and conditions of, and shall fully and faithfully comply with all of the obligations of a New Lender under, the Intercreditor Agreement.
2. Among other obligations of a New Lender under the Intercreditor Agreement, Microcap shall not amend, supplement, restate or replace (including an increase or decrease in the principal amount thereof), waive the terms of, or otherwise modify the Microcap Transaction Documents without the written approval of KLP and KP; provided, however, that KLP and KP hereby grant prior approval for any amendment of the Microcap Transaction Documents to increase the maximum amount of the Microcap Loan to $450,000 (the maximum amount referred to in Section 1(b) above).
3. The name and address of Microcap is:

Koyah Microcap Partners Master Fund, L.P.

601 W. Main, Suite 600

Spokane, WA 99201

Attn: Robert Law

Fax: 509-623-0588

4. As used in the Intercreditor Agreement, the term "New Lender" shall hereafter mean and include Raven, Ventures and Microcap, in addition to any additional New Lender who may be added to the Intercreditor Agreement pursuant to Section 6 thereof, as specified in another Joinder Agreement. Without limiting the generality of the forgoing, as used in the Intercreditor Agreement (i) the term "New Lender Agreements" shall hereafter mean and include the Raven Agreement, the Ventures Agreement and the Microcap Agreement; (ii) the term "New Lender Notes" shall hereafter mean and include the Raven Note, the Ventures Note and the Microcap Note; (iii) the term "New Lender Security Agreements" shall hereafter mean and include the Raven Security Agreement, the Ventures Security Agreement and the Microcap Security Agreement; (iv) the term "New Lender Stock Pledge Agreements" shall hereafter mean and include the Raven Stock Pledge Agreement, the Ventures Stock Pledge Agreement and the Microcap Stock Pl edge Agreement; (v) the term "New Lender Transaction Documents" shall hereafter mean and include the Raven Transaction Documents, the Ventures Transaction Documents and the Microcap Transaction Documents; and (vi) the term "New Lender Loans" shall hereafter mean and include the Raven Loans, the Ventures Loans and the Microcap Loans. In addition, the following terms used in the Intercreditor Agreement shall hereafter mean and include:

"Credit Obligations" means all outstanding and unpaid obligations of every nature of the Company (i) to Koyah under the Koyah Transaction Documents and the Koyah Loans, as the same may be modified in accordance with Section 4(g), whether now existing or hereafter incurred and without any limit on the current or future principal amount thereof, (ii) to Raven under the Raven Transaction Documents and the Raven Loans, but only up to a limit on the current and future principal amount thereof of $100,000 (after giving effect to the partial conversions referred to above) unless a greater amount is approved by KLP and KP, as (but only to the extent) the same may be modified in accordance with Section 4(g), (iii) to Ventures under the Ventures Transaction Documents and the Ventures Loans, but only up to a limit on the current and future principal amount thereof of $350,000 (after giving effect to the partial conversions referred to above) unless a greater amount is approved by KLP and KP, a s (but only to the extent) the same may be modified in accordance with Section 4(g), (iv) to Microcap under the Microcap Transaction Documents and the Microcap Loan, but only up to a limit on the current and future principal amount thereof of $450,000 unless a greater amount is approved by KLP and KP pursuant to Section 4(g), as (but only to the extent) the same may be modified in accordance with Section 4(g); and (v) to any additional New Lender who may be added to the Intercreditor Agreement pursuant to Section 6 thereof, as specified in another Joinder Agreement.

"Loans" means (i) the Koyah Loans, (ii) the Raven Loans, (iii) the Ventures Loans, (iv) the Microcap Loans and (v) the Loan(s) of any additional New Lender who may be added to the Intercreditor Agreement pursuant to Section 6 thereof, as specified in another Joinder Agreement.

"Notes" means (i) the Koyah Notes, (ii) the Raven Note, (iii) the Ventures Note, (iv) the Microcap Note and (v) the Note(s) of any additional New Lender who may be added to the Intercreditor Agreement pursuant to Section 6 thereof, as specified in another Joinder Agreement.

"Transaction Documents" means (i) the Koyah Transaction Documents, (ii) the Raven Transaction Documents, (iii) the Ventures Transaction Documents, (iv) the Microcap Transaction Documents and (v) the Transaction Documents(s) of any additional New Lender who may be added to the Intercreditor Agreement pursuant to Section 6 thereof, as specified in another Joinder Agreement.

3. Effectiveness.

The effectiveness of this Agreement is conditioned upon Microcap completing and funding at least $200,000 principal amount of the Microcap Loans not later than December 31, 2004 under the Microcap Transaction Documents, which shall be in form and substance acceptable to KLP and KP.

4. Notice of Joinder Agreement.

Koyah, as the Majority In Interest under the Intercreditor Agreement, and Microcap, as an additional New Lender under the Intercreditor Agreement, shall promptly notify the Company and the other Lenders by sending them a copy of this Agreement.

5. Miscellaneous.
1. Microcap acknowledges that it has, independently and without reliance upon the Collateral Agent or any other Lender or the reputation or involvement of the Collateral Agent or any other Lender and based upon such documents and information as it has deemed appropriate, made its own credit and/or investment analysis and decisions in connection with entering into its Transaction Documents or this Agreement. Microcap also acknowledges that it will, independently and without reliance upon the Collateral Agent or any other Lender and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit and/or investment decisions in connection with taking or not taking action under its Transaction Documents, this Agreement or any other agreement to which it is a party with respect to the Company.
2. Each party hereto agrees to do such further acts and things and to execute and deliver such additional agreements, powers and instruments as any other party to this Agreement or the Intercreditor Agreement may reasonably request to effect the terms, provisions and purposes hereof or thereof or to better assure and confirm unto such other party hereto its respective rights, powers and remedies hereunder or thereunder.
3. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing such counterpart. A facsimile copy of the signature of any party on any counterpart shall be effective as the signature of the party executing such counterpart for purposes of effectiveness of this Agreement.
4. In case any provision or obligation under this Agreement or the Intercreditor Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provisions or obligations in any other jurisdiction, shall not in any way be affected or impaired.
5. The Agreement, together with the Intercreditor Agreement, shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties to this Agreement or the Intercreditor Agreement, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non-conveniens. Notwithstanding the foregoing, any party obtaining any order or judgment in any of the above referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.
6. This Agreement supplements and forms a part of the Intercreditor Agreement. This Agreement, together with the Intercreditor Agreement, constitutes the entire agreement of the parties concerning the subject matter hereof, all prior discussions, proposals, negotiations and understandings having been merged herein.
7. This Agreement, together with the Intercreditor Agreement, shall inure to the benefit of and be binding upon the successors and assigns the Lenders and shall be binding upon the successors and assigns of the Company. Nothing in this Agreement or the Intercreditor Agreement, express or implied, is intended to confer upon the Company or any party other than the parties hereto or thereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement or the Intercreditor Agreement, except as may be expressly provided in this Agreement or the Intercreditor Agreement.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by its duly authorized officer or officers as of the day and year first above written.

KLP: KOYAH LEVERAGE PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: Name: Title: Address: 601 W. Main, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: 509-623-0588	KP: KOYAH PARTNERS, L.P. By: Koyah Ventures LLC, its general partner By: Name: Title: Address: 601 W. Main, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: 509-623-0588
Microcap: KOYAH MICROCAP PARTNERS MASTER FUND, L.P. By:Koyah Ventures LLC, its general partner By: Name: Title: Address: 601 W. Main, Suite 600 Spokane, WA 99201 Attn: Robert Law Fax: 509-623-0588

[Signature page to Joinder Agreement]

I:\Spodocs\28601\00024\agree\00280943.DOC:lg

EX-7

AGREEMENT

THIS AGREEMENT (this "Agreement") is entered into as of December 16, 2004 between AURA SYSTEMS, INC., a Delaware corporation (the "Company"), and KOYAH MICROCAP PARTNERS MASTER FUND, L.P., a Cayman Islands limited partnership (the "Lender").

WHEREAS, the Company has requested that the Lender make loans to the Company;

WHEREAS, in addition to this Agreement, the Company will be executing and delivering a Convertible Promissory Note (the "Note"), a Security Agreement (the "Security Agreement"), and a Stock Pledge Agreement (the "Stock Pledge Agreement") (collectively, the "Transaction Documents");

WHEREAS, in order to induce the Lender to make such loans and in connection with the Company and the Lender entering into the Transaction Documents, the parties wish to provide for certain related matters, on the terms and conditions set forth herein;

WHEREAS, the Company has previously entered into certain secured loans with (i) Koyah Partners, L.P., a Delaware limited partnership ("Koyah"), and Koyah Leverage Partners, L.P., a Delaware limited partnership ("Koyah Leverage"), (ii) Prudent Bear Fund, Inc., a Maryland corporation ("Prudent Bear"), and Edgar Appleby, an individual ("Appleby"), and (iii) Raven Partners, L.P., a Delaware limited partnership ("Raven") and Koyah Ventures LLC, a Delaware limited liability company ("Ventures");

WHEREAS, Prudent Bear and Appleby have converted all of their secured loans into equity, leaving Koyah Leverage, Koyah, Raven and Ventures as the remaining secured lenders (the "Prior Lenders");

WHEREAS, the Prior Lenders have converted part of their secured loans to equity as well;

NOW, THEREFORE, for valuable consideration, the receipt of which is hereby acknowledged, the parties do hereby agree as follows:

1. Representations and Warranties of the Company. The Company hereby represents and warrants to the Lender as follows:

(a) The Company (i) is a corporation duly organized, validly existing and in good standing under the laws of Delaware; (ii) has the power and authority to own, lease and operate its properties and carry on its business as now conducted; and (iii) is duly qualified, licensed to do business and in good standing under any foreign corporation laws in each jurisdiction where the failure to be so qualified or licensed could reasonably be expected to have a material adverse effect on the business, assets, operations, prospects or financial or other condition of the Company.

(b) The execution, delivery and performance of the Transaction Documents by the Company and the performance and consummation by the Company of the transactions contemplated in the Transaction Documents have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize the Transaction Documents or the performance or consummation of any of the transactions contemplated hereby.

(c) The Transaction Documents have been duly executed and delivered by the Company and constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability may be limited by bankruptcy and other laws affecting the rights and remedies of creditors generally and general principles of equity.

(d) The Company has taken or will take all necessary corporate action to authorize and reserve for issuance and to permit it to issue, upon conversion of the Note, the shares issuable upon such conversion; all of such shares, upon their issuance and delivery in accordance with the terms of the Note, will be validly issued, fully paid and nonassessable.

(e) The execution and delivery by the Company of the Transaction Documents and the performance and consummation of the transactions contemplated thereby, do not and will not: (i) violate the Company's Articles of Incorporation or Bylaws ("Charter Documents") or any material judgment, order, writ, decree, statute, rule or regulation applicable to the Company; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other person or entity to accelerate (whether after the giving of notice or lapse of time or both), any material mortgage, indenture, agreement, instrument or contract to which the Company is a party or by which it is bound; or (iii) result in the creation or imposition of any lien upon any property, asset or revenue of the Company or the suspension, revocation, impairment, forfeiture, or non-renewal of any material permit, license, authorization or approval applicable to the Company, its business or operations, or any of its assets or properties.

(f) No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or other person or entity (including, without limitation, the shareholders of any person or entity) is required in connection with the execution and delivery of the Transaction Documents by the Company and the performance and consummation of the transactions contemplated thereby.

(g) The Company is not in violation of or in default with respect to: (i) the Charter Documents or any material judgment, order, writ, decree, statute, rule or regulation applicable to the Company; or (ii) any material mortgage, indenture, agreement, instrument or contract to which such person or entity is a party or by which it is bound (nor is there any waiver in effect which, if not in effect, would result in such a violation or default). Notwithstanding the foregoing, the Lender waives any breach of this representation and warranty arising from the existing defaults listed under the heading "Defaults" in the attached Schedule of Exceptions, so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement. In addition, the Lender also waives an y breach of this representation and warranty arising from any other defaults referred to in the Company's Form 10-Q for the quarter ended November 30, 2003, so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement; it being understood, however, that this waiver is for the purpose of acknowledging the existence of such other defaults and for waiving them under this Section 1(g) only, but this waiver shall not apply to Section 13(b) of the Note or any other provisions of the Transaction Documents or the Lender's rights and remedies with respect to such provisions.

(h) No actions (including, without limitation, derivation actions), suits, proceeds or investigations are pending or, to the knowledge of the Company, threatened against the Company at law or in equity in any court or before any other governmental authority that if adversely determined would: (i) (alone or in the aggregate) have a material adverse effect on the business, assets, operations, prospects or financial or other condition of the Company or (ii) enjoin, either directly or indirectly, the execution, delivery or performance by the Company of the Transaction Documents or the transactions contemplated thereby. Notwithstanding the foregoing, the Lender waives any breach of this representation and warranty arising from any actions or suits referred to in the Company's Form 10-Q for the quarter ended November 30, 2003, so long as any party involved in such actions or suits takes no further actions and exercises no further remedies to collect on the obligations involved or enfo rce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement; it being understood, however, that this waiver is for the purpose of acknowledging the existence of such actions or suits and for waiving them under this Section 1(h) only, but this waiver shall not apply to Section 13(b) of the Note or any other provisions of the Transaction Documents or the Lender's rights and remedies with respect to such provisions.

(i) The Company owns and has good and marketable title or a valid leasehold interest in all assets and properties as reflected in the most recent financial statements delivered to the Lender and all assets and properties acquired by the Company since such date, free and clear of liens and encumbrances except for liens in favor of the Prior Lenders. Notwithstanding the foregoing, the Lender waives any breach of this representation and warranty arising from the existing liens listed under the heading "Liens" in the attached Schedule of Exceptions, so long as any creditor holding such lien takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement.

(j) The Company owns or possesses sufficient legal rights to all patents, patent applications, trademarks, service marks, trademark and service mark applications, trade names, copyrights, trade secrets, licenses, information, processes and other intellectual property rights ("Intellectual Property Rights") necessary for its business as now conducted and as proposed to be conducted, free and clear of any liens or encumbrances and without any conflict with, or infringement of the rights of, others.

(k) The financial statements of the Company that have been delivered to the Lender: (i) are in accordance with the books and records of the Company, which have been maintained in accordance with good business practices; (ii) have been prepared in conformity with accounting principles generally accepted in the United States; and (iii) fairly present the consolidated financial position of the Company as of the dates presented therein and the results of operations, changes in financial positions or cash flows, as the case may be, for the periods presented therein. The Company does not have any contingent obligations, liability for taxes or other outstanding obligations that are material in the aggregate, except as disclosed in such financial statements. Since the date of such financial statements, there has been no material adverse change in the financial position, business, operations, assets, liabilities or prospects of the Company, except as listed in the attached Schedule of Ex ceptions.

(l) The Company has total assets in excess of $2,000,000 according to its most recent financial statements, which are dated not more than ninety (90) days prior to the date of this Agreement and the loans contemplated hereby and were prepared (i) in accordance with generally accepted accounting principles (and on a consolidated basis if the Company has consolidated subsidiaries) or (ii) in accordance with the rules and requirements of the Securities and Exchange Commission, whether or not required by law to be prepared in accordance with those rules and requirements. The Company, and its officers and directors, have a preexisting business relationship with the Lender.

(m) All reports required to be filed by the Company since and including the filing of the Company's Form 10-K for the fiscal year ended February 28, 2003 (collectively, the "SEC Reports") have been duly filed with the Securities and Exchange Commission, except certain of the SEC Reports were filed late. Except as set forth in the Schedules of Exceptions attached to this Agreement, the Note and the Security Agreement: as of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder applicable to the SEC Reports; none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, no t misleading; and the financial statements of the Company included in the SEC Reports complied as of their respective dates of filing in all material respects with applicable accounting requirements and the published rules and regulations of the Securities and Exchange Commission with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of unaudited statements, as permitted by Regulation S-X promulgated by the Securities and Exchange Commission) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto), and fairly present the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

(n) The Company has timely received all of the subscription amounts and installment payments that are scheduled to be received as of the date hereof in the Company's $5,000,000 minimum/$15,000,000 maximum Series B Cumulative Convertible Preferred Stock financing (the "Series B Financing"), except as otherwise noted in the information recently provided by the Company to Lender.

(o) A complete list of all of the investors in the Series B Financing with outstanding subscription amounts or installment payments as of the date hereof is contained in the information recently provided by the Company to Lender.

(p) The sale of the Company's El Segundo facilities by the Company and its majority-owned subsidiary Aura Realty, Inc. to David Maimon and Yair Ben Moshe, on the terms contemplated in the Securities Purchase Agreement dated as of August 19, 2004 (the "Securities Purchase Agreement") among the Company and the Purchasers named therein, is in its final phase and is scheduled to close not later than January 10, 2005. The Company is not aware of any major contingencies which have not yet been waived or satisfied or any complications or problems that could prevent or delay such sale, and the Company reasonably believes that such sale will occur on such terms and within such time.

(q) The Company has settled claims held by, and received full releases from, the Company's creditors listed in the information recently provided by the Company to Lender. The remaining creditors listed in the information recently provided by the Company to Lender are out of business.

(r) The Company's current cash flow projections for the period December 2004 through March 2005 are contained in the information recently provided by the Company to Lender, and the Company has good and sufficient grounds for believing that such projections are a reasonable forecast of its cash flow situation during such period.

2. Company Acknowledgements. The Company confirms, acknowledges and agrees that (i) the Security Agreement and the Stock Pledge Agreement secure all of the Company's obligations under the Transaction Documents (ii) the Lender is under no obligation to make any advances to the Company under the Note, to grant any extension of the maturity date of the Note or, except as otherwise specifically provided in the Note, to convert any loans outstanding under the Note into equity, and (iii) any advances to the Company by the Lender under the Note, any extension by the Lender of the maturity date of the Note, any conversion of loans outstanding under the Note into equity (except as otherwise specifically provided in the Note), or any other financing of the Company by the Lender or its affiliates, are at the option of the Lender and its affiliates, in their sole discretion.

3. Further Assurance. The representations and warranties of the Company contained in this Agreement include, among others, a representation and warranty that the execution, delivery and performance by the Company of this Agreement and the other Transaction Documents and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company's Board of Directors. As a further assurance to the Lender with respect to such representation and warranty, the Company shall deliver to the Lender, within five (5) business days after request of the Lender, evidence satisfactory to the Lender in its sole discretion of the authorization by the Company's Board of Directors of the execution, delivery and performance by the Company of this Agreement and the other Transaction Documents and the consummation by the Company of the transactions contemplated hereby and thereby.

4. Survival. The representations and warranties and the covenants of the Company contained in this Agreement shall survive the closing of the transactions contemplated by the Transaction Documents.

5. Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Lender in the case of an amendment and only with the written consent of the waiving party in the case of a waiver.

6. Entire Agreement. This Agreement, together with the other Transaction Documents, constitute the entire agreement of the parties concerning the subject matter hereof and thereof, all prior discussions, proposals, negotiations and understandings having been merged herein and therein.

7. Intercreditor Agreement. The terms and conditions of this Agreement and the other Transaction Documents shall also be governed by and subject to the terms and conditions of an Intercreditor Agreement dated as of January 19, 2004, as supplemented by a Joinder Agreement dated as of June 14, 2004, among the Company and the Prior Lenders, to which the Lender is being added as an additional party pursuant to a further Joinder Agreement dated as of the date hereof (collectively, the "Intercreditor Agreement").

8. Successors. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company and the Lender. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

9. Severability. If any part of this Agreement is determined to be illegal or unenforceable, all other parts shall remain in full force and effect.

10. Attorneys' Fees. The Company shall pay the reasonable attorneys' fees, costs and disbursements of the Lender in enforcing any terms of this Agreement, whether or not any action at law or in equity is brought.

11. Governing Law. Consistent with the governing law and venue provisions of the Intercreditor Agreement, this Agreement shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties hereto, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non-conveniens. Notwithstanding the foregoing, any party obtaining any order or judgment in any of the above referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.

12. Miscellaneous. Any notice under this Agreement shall be given in writing and shall be addressed to the party to be notified at the address indicated below, or at such other address as such party may designate by written notice to the other party.

Aura Systems, Inc.
2335 Alaska Avenue
El Segundo, CA 90245
Attn: Neal Meehan

Fax: 310-643-8719

Koyah Microcap Partners Master Fund, L.P.

c/o ICM Asset Management, Inc.

601 W. Main Avenue, Suite 600

Spokane, WA 99201

Attn: Robert Law

Fax: 509-444-4500

13. Lender's Legal Fees and Expenses.

(a) The Company shall pay the costs and expenses of legal counsel to the Lender in connection with (i) the evaluation of loans to the Company, (ii) the negotiation, execution and delivery of this Agreement, the other Transaction Documents and any other related agreements with the Lender as well as the consummation of the transactions contemplated by such agreements, the administration of such agreements and any amendments or waivers of such agreements, (iii) the preparation and completion of any secured loan, securities and other filings necessary or appropriate in connection therewith and (iv) the evaluation, discussion and negotiation by the Lender, as debt or equity holder of the Company, of any financing, sale or similar proposals or expressions of interest involving the Company which may be made or advanced by any persons or entities (including without limitation the Lender or its affiliates) and the negotiation, execution and delivery of any related agreements as well as the consummation of the transactions contemplated thereby. The Company shall pay such costs and expenses immediately upon submittal. Alternatively, (x) the Lender may hold back and deduct up to $20,000 from the proceeds of the loan when disbursing such loan to be applied against some or all of such costs and expenses under this Section 13(a) and/or reimbursement of costs and expenses under Section 13(b), in which case such holdback shall constitute principal advanced under the Notes and/or (y) pay such costs and expenses directly, in which case the amounts so paid shall constitute additional amounts payable by the Company under this Agreement and the Note, bear interest at the rate set forth in the Note and be payable in cash only. Notwithstanding that the Company is paying such costs and expenses, the Company acknowledges and agrees that such legal counsel is representing only the Lender, and not the Company.

(b) In addition, the Lender and its affiliates (including without limitation Koyah Leverage, Koyah, Raven, Ventures and ICM Asset Management, Inc.), as well as the partners, directors, officers, shareholders, members, employees or agents thereof, shall be entitled to reimbursement of, and immediately upon submittal the Company shall pay, the legal fees and expenses incurred by the foregoing parties in connection with any threatened or actual action, suit, claim, proceeding or investigation arising out of any assertion that the promissory notes or other agreements or documents between the Company and the foregoing parties as well as the consummation of the transactions contemplated thereby (the "Agreements and Transactions") result in any purchase or sale or other acquisition or disposition of an equity security or a derivative security (a "Section 16 Event") within the meaning of, and for purposes of, Section 16 of the Securities Act of 1934, as amended, and the rules and regula tions promulgated thereunder ("Section 16"), unless it shall ultimately be determined by final judicial decision (from which there is no further right of appeal) that the Agreements and Transactions did result in a Section 16 Event and in liability under Section 16 ("Section 16 Liability") on the part of the foregoing party as a result thereof.

Furthermore, the foregoing parties shall be entitled to receive, and immediately upon submittal the Company shall pay, an advancement of expenses in advance of the final disposition of any such action, suit, claim, proceeding or investigation. Such advancement of expenses shall be made upon delivery to the Company of an undertaking on the part of the foregoing parties to repay the amounts so advanced if it shall ultimately be determined by final judicial decision (from which there is no further right of appeal) that the Agreements and Transactions did result in a Section 16 Event and in Section 16 Liability on the part of the foregoing party as a result thereof. In the event the foregoing parties pay such costs and expenses directly, the amounts so paid shall constitute additional amounts payable by the Company under their respective Agreements and Convertible Promissory Notes, bear interest at the rate set forth in such Convertible Promissory Notes, and be payable in cash only.

The provisions of this Section 13(b) are specifically intended to be for the benefit of each of the foregoing parties, who are intended to be third-party beneficiaries of such provisions and entitled to enforce them directly.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first set forth above.

AURA SYSTEMS, INC.

By:

Name:

Title:

KOYAH MICROCAP PARTNERS MASTER FUND, L.P.

By: Koyah Ventures LLC, its general partner

By:

Name:

Title:

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Schedule of Exceptions

Liens

1. El Seguendo real property and facilities are subject to a security interest related to mortgage financing and a pending sale/leaseback transaction.

2. Note receivable for approximately $1,000,000 under Alpha Ceramics purchase agreement has been assigned as collateral to the purchasers in such sale/leaseback transaction.

3. The Plaintiffs in Arthur Schwatz v. Aura Systems, Inc. received a Writ of Attachment to collect a portion of their judgment. On May 3, 2004, the Plaintiffs used this Writ to effect a levy against the Company's primary bank account and received approximately $191,689. On May 11, 2004, Plaintiffs returned those funds to the Company without relinquishing their rights under the Writ. On June 7, 2004, the Plaintiff and the Company entered an Agreed Judgment in this case with a 45 day delayed effective date.

Defaults

1. Shareholder litigation (Barovich/Chiu et al ) judgment settlement for approximately $789,000 is in default. In April of 2003, this creditor served Writs of Execution against one of the Company's bank accounts but has taken no further action.

2. Convertible notes issued in August October 2002 for a total principal amount of $625,000 are or may be in default.

3. The $1,000,000 Note Payable to the purchasers in the sale/leaseback transaction, dated December 1, 2002, became due and payable on May 30, 2004.

Financial Statements

1. The long-term note receivable from Alpha Ceramics was assigned to the Purchasers in the Sale/Leaseback Agreement, dated December 1, 2002, as disclosed in the footnotes and MD&A of recent public filings (see Liens Note 2 above); however, this receivable was included on the balance sheet in the most recent financial statements.

EX-8

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION, (B) THE TRANSFER IS MADE IN ACCORANCE WITH RULE 144 UNDER SUCH ACT, (C) THE BORROWER RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THE NOTE (CONCURRED IN BY LEGAL COUNSEL FOR THE BORROWER) STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (D) THE BORROWER OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.

CONVERTIBLE PROMISSORY NOTE

Principal Amount: $210,000 Spokane, Washington
Interest Rate: 10% December 23, 2004

FOR VALUE RECEIVED, the undersigned, AURA SYSTEMS, INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order of KOYAH MICROCAP PARTNERS MASTER FUND, L.P., a Cayman Islands limited partnership ("Lender"), at such places and times and under the terms and conditions set forth below, the lesser of (i) the maximum principal amount of this Convertible Promissory Note (this "Note") set forth above and (ii) the aggregate principal amount advanced by Lender at its option from time to time under this Note, together with interest thereon and any other amounts set forth herein.

1. Principal Payments. The entire principal balance of this Note shall be due and payable as follows (the "Maturity Date"): after August 19, 2005, such principal balance shall be due and payable upon five (5) days demand; provided however, that if all of the conditions set forth in Section 10 of this Note, other than the condition set forth in clause (iii)(A) thereof have been satisfied as of August 19, 2005, then the Maturity Date (if all other Section 10 conditions remain satisfied at the commencement of each extension) shall be further amended and extended for up to four (4) successive three (3) month periods (ending respectively on November 19, 2005, February 19, 2006, May 19, 2006 and August 19, 2006) to allow such condition set forth in Section 10(iii)(A) to be satisfied. If the condition set forth in Section 10 (iii)(A) is not satisfied by August 19, 2006, such principal balance shall be due and payable upon five (5) days demand.
2. Interest Rate and Payment. The outstanding principal balance of this Note shall accrue interest at the rate of ten percent (10%) per annum. Accrued interest under this Note shall be due and payable on the Maturity Date.
3. Prepayment. This Note may be prepaid in whole but not in part, at any time upon ten (10) business days' prior written notice, without any premium or penalty. In the event of any tender of prepayment of this Note by Borrower, Lender shall have the right to exercise its conversion rights instead of electing acceptance of such prepayment, as provided in Section 9 of this Note.
4. Collection Costs Borne by Borrower. Borrower agrees to pay all costs and expenses, including without limitation reasonable attorneys' fees, incurred by Lender in enforcing the terms of this Note or in collecting this Note, including without limitation in any out-of-court workout, any court action, any appeal or any bankruptcy proceeding.
5. Late Charge. If any payment of principal or interest under this Note shall not be made within five (5) days after the due date, this Note shall bear interest (after as well as before judgment) at a rate of five percent (5%) per annum above the rate of interest which would otherwise have been payable under this Note or the maximum rate of interest permitted to be charged by applicable law, whichever is less.
6. Governing Law. Consistent with the governing law and venue provisions of the Intercreditor Agreement (as defined below), this Note shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties hereto, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non-conveniens. Notwithstanding the foregoing, any party obtaining any order or judgment in any of the above referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.
7. Intended Beneficiaries. Nothing in this Note, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Note, except as may be otherwise expressly provided in this Note.
8. Severability. If any part of this Note is determined to be illegal or unenforceable, all other parts shall remain in full force and effect.
9. Conversion of Note. At the option of Lender, the outstanding principal balance of this Note and all accrued interest, fees or other amounts payable under this Note, at any time prior to acceptance by Lender of payment thereof instead of conversion as provided below, may be converted, in whole or in part, into units (the "Units") consisting of shares of Series B Cumulative Convertible Preferred Stock (the "Series B Stock") and warrants to purchase Common Stock (the "Warrants") of Borrower, at the same price and on the same other terms and conditions as the $5,000,000 minimum/$15,000,000 maximum Series B Cumulative Convertible Preferred Stock financing (the "Series B Financing"), as set forth in the Securities Purchase Agreement (the "Securities Purchase Agreement") with the initial investors in the Series B Financing which is attached as Exhibit A to the Amendment and Conversion Agreement dated as of August 19, 2004 (the "Amendment and Conversion Agreement") among Borr ower and the Lenders named therein (collectively, the "Prior Intercreditor Lenders"), the terms and conditions of which are incorporated herein by reference; provided, however, that the following terms shall be adjusted as applied to Lender (as similarly adjusted for the Prior Intercreditor Lenders): (i) the subscription amount shall be the amount being converted by Lender in the particular conversion involved and the subscription date shall be the date of such conversion; (ii) the option to purchase additional Units contained in Section 1.5 of the Securities Purchase Agreement (A) shall be in an amount up to fifty percent (50%) of the total number of Units issuable to Lender upon full conversion of this Note and (B) shall be exercisable by Lender, in whole or in part, at any time on or before May 31, 2005, (1) in increments as set forth in Schedule 1 attached hereto and (2) subject to earlier termination upon notice as set forth in Section 1.5(a)(iii) of the Securities Purchase Agreement, but with th e amount of the option exercisable under the circumstances described in Section 1.5(a)(iii) being equal to fifty percent (50%) of the unexercised portion of the original option; (iii) Section 4.5 of the Securities Purchase Agreement shall not apply to Lender and instead shall be replaced by Section 13 of the Agreement dated as of the date hereof between Borrower and Lender (the "Agreement"); (iv) Section 8.1 of the Securities Purchase Agreement shall not apply to Lender and instead shall be replaced by Section 11 of the Agreement; and (v) the Registration Rights Agreement referred to in the Securities Purchase Agreement shall not apply to the Lender and shall be replaced by the Registration Rights Agreement referred to in the Amendment and Conversion Agreement. Upon any conversion, Borrower and Lender shall be deemed to have entered into a Securities Purchase Agreement (with such adjusted terms) for such conversion, as if executed and delivered by them.

Upon any tender of payment of this Note by Borrower (whether by prepayment before maturity or payment at or after maturity), Lender shall have ten (10) business days thereafter to elect either acceptance of such payment instead of conversion or exercise of its conversion right, in whole or in part. In the event Lender fails to make such election by such date, Lender shall be deemed to have elected acceptance of payment instead of conversion, provided that the payment tendered is the full amount owing under this Note. Any exercise of such conversion right shall be at the option of Lender, in its sole discretion. Lender may exercise such conversion right by providing to Borrower written notice of exercise in the form attached as Exhibit B to the Amendment and Conversion Agreement or other appropriate form. In the event of any stock splits, stock dividends, recapitalizations or similar events after the date hereof but prior to the date of conversion, then the number and kind of sec urities issuable upon conversion shall be appropriately adjusted. Such conversion shall be effective immediately upon giving such notice and as of such date Lender shall be treated for all purposes as the holder of the securities issuable upon conversion.

As soon as practicable after such conversion, Borrower, at its expense, shall cause to be issued in the name of and delivered to Lender the securities to which Lender shall be entitled upon such conversion. Upon a partial conversion of this Note, (i) this Note may be surrendered by Lender and replaced with a new Note of like tenor for the remaining balance of the Note surrendered or (ii) Lender may retain this Note and the parties may keep separate records of the outstanding balance of this Note. A new Note shall be delivered to Lender as soon as practicable after any such surrender. No fractional shares shall be issued upon such conversion. If upon such conversion a fractional share results, the number of shares to be issued upon conversion shall be rounded upwards or downwards to the nearest whole number.

10. Mandatory Conversion of Note. At the end of each calendar quarter after the Company has received a total of $4,100,000.00 in New Funds, plus an additional amount equal to Costs and Fees (as those terms are defined below), but subject to the conditions set forth below, Lender shall exercise its conversion rights under Section 9 for an aggregate conversion amount (a "Mandatory Conversion") in the same percentage of outstanding loans as the Additional Conversions of the Prior Intercreditor Lenders occurring under Section 9(b) of the Amendment and Conversion Agreement. Lender shall exercise such conversion right by giving written notice thereof. For purposes of this paragraph the term "New Funds" means cash received by the Company after the initial closing of the Series B financing from payments due under notes made by investors under the Securities Purchase Agreement or from cash received from new investors; it being understood that funds received from Lender do not constit ute New Funds. New Funds shall not include, among other things (1) funds received at or prior to the time of initial closing of the Series B financing, (2) debt converted at the time of initial closing of the Series B financing, (3) conversions of dividend accruals or stock issued in exchange for non-cash consideration or (4) funds paid to or on account of the Company in connection with the sale of the real property located at 2335 Alaska Avenue and 2330 Utah Avenue, El Segundo, California (the "Real Estate"). For purposes of this paragraph the term "Costs and Fees" means any legal costs and legal fees incurred by others and paid or payable by the Company in connection with the (m) sale of the Real Estate including, without limitation, assumption by the purchasers thereof of the debt on the Real Estate, (n) settlement with the minority Shareholders of Aura Realty, Inc., and (o) settlement of litigation filed by, and other claims of, certain former officers and employees pursuant to a Mutual Settlement Agreem ent and Release between the Company and Arthur Schwartz, et. al., dated as of August ___, 2004.

The obligations of Lender to do any Mandatory Conversion shall be subject to the following conditions: (i) all investors in the Series B Financing have fulfilled all of their respective obligations under the Securities Purchase Agreement(s) for the Series B Financing and any related promissory notes or other agreements or documents and the Company has received all of the funds as scheduled under such Securities Purchase Agreement(s) and any related promissory notes or other agreements or documents; (ii) the authorized number of shares of Common Stock of the Company has been increased sufficiently; (iii) (A) the registration statement described in Section 1.3 of the Registration Rights Agreement (as defined below) is effective or (B) an automatic conversion has occurred under Section 6(a)(ii) of the Certificate of Designations for the Series B Financing; and (iv) the Company has resolved matters with its creditors in a manner satisfactory to the Prior Intercreditor Lenders hold ing a majority of the then outstanding total balance of the Convertible Promissory Notes held by the Prior Intercreditor Lenders.

In the event that Lender has previously exercised its conversion right other than as part of the Mandatory Conversions, the amount of such other conversion shall be credited against Lender's amount of subsequent Mandatory Conversions. In the event that (x) additional issuances and fundings of the Series B Financing occur during any calendar quarter but the conditions to the obligations of Lender to do any Mandatory Conversion are not satisfied at the end of such calendar quarter and (y) such conditions are subsequently satisfied, the obligations of Lender to do such Mandatory Conversion shall become effective on the date that such conditions are subsequently satisfied.

11. Registration Rights Agreement and Shareholder Agreement. In connection with this Note, Lender is entering into a Registration Rights Agreement with the Company in the form attached as Exhibit F to the Amendment and Conversion Agreement (the "Registration Rights Agreement"). Upon any conversion of this Note, Lender shall enter into a Shareholder Agreement with other Series B shareholders in the form attached as Exhibit D to the Securities Purchase Agreement (the "Shareholder Agreement").

12. Representations of Lender. By acceptance of this Note, Lender represents to Borrower that Lender is an "accredited investor" as such term is defined in Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), and that this Note and any securities issuable upon any conversion thereof are being acquired for Lender's own account and for the purpose of investment and not with a view to, or for sale in connection with, the distribution of the same, nor with any present intention of distributing or selling the same.

13. No Shareholder Rights. This Note shall not entitle Lender to any voting rights or any other rights as a shareholder of Borrower until any conversion of this Note.

14. Security. This Note shall be secured by a junior security interest in tangible and intangible personal property of Borrower pursuant to the Prior Security Agreement and the Prior Stock Pledge Agreement.

15. Defaults. Each of the following shall constitute a default under this Note (a "Default"):

1. Failure by Borrower to make any payment due under this Note or under any other agreement with Lender or the Prior Intercreditor Lenders; any representation or warranty by Borrower under this Note or any other agreement with Lender or the Prior Intercreditor Lenders shall be false or inaccurate in any material respect when made; or failure by Borrower to comply with the provisions of any other covenant, obligation or term of this Note or any other agreement with Lender or the Prior Intercreditor Lenders;
2. Failure by Borrower to pay when due any other indebtedness or obligations in excess of fifty thousand dollars ($50,000) which shall continue after the applicable grace period, if any, specified in the agreement relating to such indebtedness or obligation; failure by Borrower to comply with the provisions of any other covenant, obligation or term of any agreement relating to such indebtedness or obligation which shall continue after the applicable grace period, if any, specified in such agreement if the effect of such failure is to accelerate, or permit the acceleration of, the due date of such indebtedness or obligation; or any such indebtedness or obligation shall be declared to be due and payable, or required to be prepaid, prior to the stated maturity date thereof; provided, however, that the existing defaults listed in the Schedule of Exceptions attached hereto as Schedule 2 shall not constitute a Default so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved and the Company otherwise remains in compliance with all other provisions of this Note and all other agreements with Lender and the Prior Intercreditor Lenders;
3. Borrower makes a general assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, petitions to any court for a receiver or trustee for Borrower or any substantial part of its property, commences any proceeding relating to the arrangement, readjustment, reorganization or liquidation under any bankruptcy or similar laws; there is commenced against Borrower any such proceedings which remain undismissed for a period of sixty (60) days; or Borrower by any act indicates its consent or acquiescence in any such proceeding or the appointment of any such trustee or receiver;

(d) Lender shall fail to have a valid perfected security interest in any of the collateral covered by the Security Agreement, a valid security interest in the any of the collateral covered by the Stock Pledge Agreement or a perfected security interest in any of the collateral covered by the Stock Pledge Agreement after delivery thereof to Lender or its agent or designee; or

(e) The investors in the Series B Financing shall fail to fulfill or default on any of their respective obligations under the Securities Purchase Agreement(s) for the Series B Financing or any related promissory notes or other agreements or documents or Borrower shall fail to receive all of the funds as scheduled under such Securities Purchase Agreement(s) or any related promissory notes or other agreements or documents, in each case if (i) the subscription amount(s) of the defaulting or non-paying investor(s) is at least twenty percent (20%) of the total subscription amounts of all investors in the Series B Financing and (ii) the default or failure to receive funds continues for sixty (60) days from the scheduled due date.

16. Acceleration; No Exclusive Remedy. Upon any Default set forth in Section 15(c) above, all principal, interest and other amounts owing hereunder automatically shall become immediately due and payable. Upon any other Default, Lender may declare, by written notice to Borrower, that all principal, accrued interest and other amounts owing hereunder shall be immediately due and payable to Lender. Notwithstanding anything to the contrary herein, Lender shall be entitled to any and all remedies available to it in the event of a Default hereunder and Lender's pursuance of any particular remedy shall not preclude Lender from seeking any other remedies available to it at law or in equity.

17. Notices. Any notice under this Note shall be given in writing and shall be addressed to the party to be notified at the address indicated below, or at such other address as such party may designate by written notice to the other party.

Aura Systems, Inc.
2335 Alaska Avenue
El Segundo, CA 90245
Attn: Raymond Yu
Fax: 310-643-8719

Koyah Microcap Partners Master Fund, L.P.

c/o ICM Asset Management, Inc.

601 W. Main Avenue, Suite 600

Spokane, WA 99201

Attn: Robert Law

Fax: 509-444-4500

18. Intercreditor Agreement. The terms and conditions of this Note shall also be governed by and subject to the terms and conditions of an Intercreditor Agreement dated as of January 19, 2004, as supplemented by a Joinder Agreement dated as of June 14, 2004 and a further Joinder Agreement dated as of December 16, 2004, among Borrower, Koyah Leverage Partners, L.P., Koyah Partners, L.P., Raven Partners, L.P., Koyah Ventures LLC and Lender (collectively, the "Intercreditor Agreement").

19. Miscellaneous.

(a) No delay or omission on the part of Lender in exercising any right under this Note shall operate as a waiver of such right or of any other right under this Note.

(b) Borrower hereby waives presentation for payment, demand, notice of demand and of dishonor and non-payment of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party. The pleading of any statute of limitations as a defense to any demand against the Borrower, any endorsers, guarantors and sureties of this Note is expressly waived by each and all of such parties to the extent permitted by law. Time is of the essence under this Note.

(c) Any payment hereunder shall first be applied to any enforcement or collections costs, then against accrued interest or late charges hereunder and then against the outstanding principal balance hereof.

(d) All payments under this Note shall be made without set-off, deduction or counterclaim.

(e) Borrower and Lender intend to comply at all times with applicable usury laws. If at any time such laws would render usurious any amounts due under this Note under applicable law, then it is Borrower's and Lender's express intention that Borrower not be required to pay interest on this Note at a rate in excess of the maximum lawful rate, that the provisions of this section shall control over all other provisions of this Note which may be in apparent conflict hereunder, that such excess amount shall be immediately credited to the principal balance of this Note, and the provisions hereof shall immediately be reformed and the amounts thereafter decreased, so as to comply with the then applicable usury law, but so as to permit the recovery of the fullest amount otherwise due under this Note.

(f) This Note may be transferred or assigned by Lender in whole or in part if, on Borrower's reasonable request, Lender provides an opinion of counsel reasonably satisfactory to Borrower that such transfer does not require registration under the Securities Act of 1933, as amended, and applicable state securities law, except that this Note may be transferred by a Lender which is a partnership or limited liability company to a partner, former partner, member, former member or other affiliate of such partner or limited liability company, as the case may be, if (i) the transferee agrees in writing to be subject to the terms of this Note and (ii) Lender delivers notice of such transfer to Borrower. Any rights and obligations of Borrower and Lender under this Note shall be binding upon and inure to the benefit of their respective permitted successors, assigns, heirs, administrators and transferees.

(g) If at any time the number of authorized but unissued shares of Borrower shall not be sufficient to effect the conversion of this Note, Borrower will take all such corporate action as may be necessary to increase its authorized but unissued shares to such number of shares as shall be sufficient for such purpose. The parties acknowledge that Borrower currently does not have any authorized but unissued shares of its common stock available for issuance and Borrower hereby agrees to use its best efforts to take action to call a shareholder meeting and increase its authorized but unissued common stock as soon as practicable.

(h) Any term of this Note may be amended and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of Borrower and Lender in the case of an amendment and only with the written consent of the waiving party in the case of a waiver.

(i) All shares issued upon conversion of this Note shall be validly issued, fully paid and non-assessable, and Borrower shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof. Borrower shall not be required to pay any transfer tax or other similar charge imposed in connection with any transfer involved in the issuance of any certificate for shares in any name other than that of Lender.

(j) Borrower will not, by amendment of its Certificate of Incorporation or Bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of Lender under this Note against impairment. Without limiting the generality of the foregoing, Borrower (i) will not increase the par value of any shares issuable upon conversion of this Note above the amount payable therefore upon such exercise, and (ii) will take all such action as may be necessary or appropriate in order that Borrower may validly and legally issue fully paid and non-assessable shares upon conversion of this Note.

[Remainder of page intentionally left blank]

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in its corporate name by its duly authorized officer and dated the day and year first above written.

AURA SYSTEMS, INC.

By:

Name:

Title:

[Signature Page to Convertible Promissory Note]

I:\Spodocs\28601\00024\agree\00288035.DOC:lg

SCHEDULE 1

Option Exercisability

1. Exercisable Increments.

The option of Lender under Section 1.5 of the Securities Purchase Agreement (as adjusted pursuant to Section 9 of the Note) shall be exercisable at any time in an amount equal to the total amount of any conversions of Lender actually done up to that time.

2. Termination.

The option of Lender under such Section (as so adjusted) shall terminate in increments (expressed as a percentage of the original total amount of such option) as follows:

	Terminated Increment
December 31, 2004	50%
May 31, 2005	50%
TOTAL	100%

Notwithstanding the foregoing, if any portion of the option of Lender is not exercisable on December 31, 2004 because the conditions to the obligation of Lender to do a Mandatory Conversion underlying such portion of the option have not been satisfied by such date, then such portion of the option shall not terminate on December 31, 2004 and shall instead be extended to May 31, 2005.

SCHEDULE 2

Schedule of Exceptions

1. Shareholder litigation (Barovich/Chiau et al) judgment settlement for approximately $789,000 is in default. In April 2003, this creditor served Writs of Execution against the Company's bank accounts but has taken no further action.

2. Convertible notes payable, issued in August October 2002 for a total principal amount of $625,000 are in default.

3. The $1,000,000 Note Payable to purchasers in a sale/leaseback transaction, dated December 1, 2002, became due and payable on May 30, 2004.

EX-9

AURA SYSTEMS, INC.

REGISTRATION RIGHTS AGREEMENT

(Intercreditor #3)

Dated as of December 23, 2004

Intercreditor #3

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of December 23, 2004, is made by and among AURA SYSTEMS, INC., a Delaware corporation (the "Company"), and THE INVESTORS LISTED ON THE SIGNATURE PAGE HEREOF (each of whom is herein called individually, a "Investor" and all of whom are herein called, collectively, the "Investors"), with reference to the following facts:

In connection with the Convertible Promissory Note dated as of the date hereof (the "Note") made by the Company in favor of the Investors, this Agreement is to be executed and delivered by the Investors and the Company.

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto further agree as follows:

1. Registration Rights. The Company covenants and agrees as follows:
0. Definitions. For purposes of this Section 1:
1. "Common Stock" means the Company's common stock, par value $.005 per share.
2. "Form S-3" means such form under the 1933 Act as in effect on the date hereof or any registration form under the 1933 Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.
3. "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof.
4. "1933 Act" means the Securities Act of 1933, as amended.
5. "1934 Act" means the Securities Exchange Act of 1934, as amended.
6. "register", "registered", and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such registration statement or document.
7. "Registrable Securities" means (i) the shares of Common Stock issuable upon conversion of the Series B Stock to be acquired by the Investors pursuant to the Note or any future convertible promissory note, stock purchase agreement or other agreement or document with the Company (the "Note and Documents"), (ii) the shares of Common Stock issuable upon exercise of the warrants to be acquired by the Investors by pursuant to the Note and Documents, (iii) any shares of Common Stock held by the Investors which were previously acquired by them, (iv) the shares of Common Stock issuable upon conversion of any Series A Stock held by the Investors which were previously acquired by them, (v) the shares of Common Stock issuable upon exercise of any warrants held by the Investors which were previously acquired by them, (vi) the shares of Common Stock issuable upon exercise of the Registration Warrants (as defined in Section 1.3(c)), and (vii) any other shares of stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in clauses (i) through (vii) above; provided that there shall be excluded any Registrable Securities sold by a person in a transaction in which that person's rights under this Section 1 are not assigned.
8. The number of shares of "Registrable Securities" outstanding shall be determined by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities.
9. "SEC" means the Securities and Exchange Commission.
10. "Series A Stock" means the Company's Series A Convertible Redeemable Preferred Stock, par value $.005 per share.
11. "Series B Stock" means the Company's Series B Cumulative Convertible Preferred Stock, par value $.005 per share.
12. Other Terms: Any other capitalized term not defined herein shall have the meaning set forth in the Note.
1. [Intentionally Omitted].
2. Agreed Registration.
1. Within one hundred twenty (120) days after the date of approval by the Company's shareholders of an increase in the number of authorized shares of Common Stock (the "Shareholder Approval Date"), the Company shall prepare and file with the SEC a registration statement on Form S-3 (or, if Form S-3 is not then available, on such form of registration statement that is then available to effect a registration of all Registrable Securities, subject to consent of the Investors holding at least a majority of the Registrable Securities) covering the registration of all of the Registrable Securities, other than the shares issuable upon exercise of the Registration Warrants. In the event that any Registration Warrants are issued, the Company shall promptly amend such registration statement to also include the shares issuable upon exercise of such Registration Warrants. The Company shall use best efforts to obtain the effectiveness of such registration statement as soon as possible thereafte r. The Company shall keep such registration statement effective at all times until the earlier of the date on which all the Registrable Securities (i) are sold by the Holders in an open market transaction and (ii) can be sold by the Holders (and any affiliate of the Holders with whom the Holders must aggregate their sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act.
2. If the Holders intend to distribute the Registrable Securities by means of an underwriting, they shall so advise the Company. The underwriter will be selected by a majority in interest (as determined by the number of Registrable Securities held) of the Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include such Holder's Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Holders) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 1.6(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Sect ion 1.3, if the underwriter advises the Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Holders shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, provided that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting.
3. If either (i) on the date one hundred twenty (120) days after the Shareholder Approval Date the registration statement described in Section 1.3(a) has not been filed or (ii) the Company fails to appropriately respond to any comments received from the SEC on such registration statement within forty-five (45) days after receipt (including the filing of an amendment to such registration statement if appropriate), then the Company, unless waived by an Investor, shall issue to each Investor a warrant in the form attached hereto as Exhibit A (each, a "Registration Warrant" and, collectively, the "Registration Warrants") to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note and Documents, excluding (x) such Registrable Securities which have been sold by that Investor in an open market transaction, or (y) can be sold by that Investor (and an y affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act. The exercise price of each such Registration Warrant shall be $.02 per share, subject to adjustment as set forth in the Registration Warrant.
4. If at the end of each subsequent thirty (30) day period thereafter either (i) the Company still has not filed the registration statement described in Section 1.3(a) or (ii) the Company still has not appropriately responded to any comments received from the SEC on such registration statement (including the filing of an amendment to such registration statement if appropriate), then the Company, unless waived by an Investor, shall issue to each Investor an additional Registration Warrant to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note and Documents, excluding (x) such Registrable Securities which have been sold by that Investor in an open market transaction, or (y) can be sold by that Investor (and any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) in any three-month period without volume limitation a nd without registration in compliance with Rule 144 under the 1933 Act.
5. If (i) the registration statement described in Section 1.3(a) becomes effective but at any time thereafter is no longer effective (or is deemed no longer effective as a result of any suspension of use under the circumstances described in Section 1.6(f)) and (ii) such lack of effectiveness continues for a forty-five (45) day period, then the Company, unless waived by an Investor, shall issue to each Investor a Registration Warrant to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note and Documents, excluding (x) such Registrable Securities which have been sold by that Investor in an open market transaction, or (y) can be sold by that Investor (and any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 unde r the 1933 Act.
6. If at the end of each subsequent thirty (30) day period thereafter, the registration statement described in Section 1.3(a) still is no longer effective (or is deemed no longer effective as a result of any suspension of use under the circumstances described in Section 1.6(f)), then the Company, unless waived by an Investor, shall issue to each Investor an additional Registration Warrant to acquire the number of shares of Common Stock equal to (i) 2.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note and Documents, excluding (x) such Registrable Securities which have been sold by that Investor in an open market transaction, or (y) can be sold by that Investor (and any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act.
7. Notwithstanding the foregoing, the maximum amount of Registration Warrants issuable to any Investor under Sections 1(d) through 1(f) shall be Registration Warrants to acquire the number of shares of Common Stock equal to (i) 12.5% multiplied by (ii) the aggregate number of shares of Registrable Securities to be acquired by such Investor pursuant to the Note and Documents.
8. The Company shall execute such other and further certificates, instruments and other documents as may be reasonably requested by the Investors or reasonably necessary or proper to implement, complete and perfect the Investors' rights under this Section 1.3 and, upon effectiveness of a registration statement with respect to the Registrable Securities, to freely trade the Registrable Securities without limitation or restriction imposed or created by the Company or securities law.
9. The terms and covenants set forth in this Section 1.3 shall terminate as to each Holder and be of no further force and effect on the earlier of the date on which all the Registrable Securities beneficially owned by that Holder (i) are registered pursuant to this Section 1.3 and sold by that Holder in an open market transaction or (ii) can be sold by that Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act.
3. Company Registration.
1. If (but without any obligation to do so) the Company proposes to register any of its stock (including a registration effected by the Company for stockholders other than the Holders) or other securities under the 1933 Act in connection with the public offering of such securities on any form which also would permit registration of the Registrable Securities, the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within thirty (30) days after such notice by the Company, the Company shall, subject to the provisions of Section 1.4(c), cause to be registered under the 1933 Act all of the Registrable Securities that each such Holder has requested to be registered.
2. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.4 prior to the effectiveness of such registration, whether or not any Holder shall have elected to include securities in such registration. The expenses of such withdrawn registration shall be borne by the Company in accordance with Section 1.8 hereof.
3. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under this Section 1.4 to include any requesting Holder's securities in such underwriting, unless such Holder accepts the terms of the underwriting as agreed between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters) and enters into an underwriting agreement in customary form with the underwriter or underwriters selected by the Company, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested to be included in such offering by the Company, the Holders and other security holders to whom registration rights have been granted exceeds the amount of securities that the underwriters determine in their sole discretion is compatible w ith the success of the offering, then the Company shall be required to include in the offering only that number of securities (including Registrable Securities) that the underwriters determine in their sole discretion will not jeopardize the success of the offering (the Registrable Securities so included to be apportioned pro rata among the selling Holders according to the total amount of Registrable Securities requested to be included therein by each selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders); provided, that the amount of Registrable Securities requested by the Holders to be included in such offering pursuant to this Section 1.4 and all other securities requested by other holders to be included in such offering pursuant to other "piggyback" registration rights shall be reduced first (the Registrable Securities and other securities so reduced to be apportioned pro rata among the selling Holders and other holders according to the total amount of Registr able Securities and other securities requested to be included therein by each selling Holder and other holder) before any reduction of any (i) securities requested to be included in such offering by any holders exercising "demand" registration rights or (ii) any securities sold by the Company to be included in such offering. For purposes of such apportionment among Holders, for any selling stockholder that is a Holder of Registrable Securities and that is a partnership or corporation, the partners, retired partners and stockholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling Holder", and any pro rata reduction with respect to such "selling Holder" shall be based on the aggregate amount of Registrable Securities requested to be included in such offering by all such related entities and individuals.
4. Form S-3 Registration. If the Company shall receive from one or more Holders a request or requests that the Company effect a registration on Form S-3 and any related blue sky or similar qualification or compliance with respect to at least 25% (or a lesser percentage if the requirements of Section 1.5(b)(i) are met) of the Registrable Securities owned by such Holder or Holders, the Company shall:
1. promptly give notice of the proposed registration, and any related blue sky or similar qualification or compliance, to all other Holders; and
2. cause, as soon as practicable, such Registrable Securities to be registered for offering and sale on Form S-3 and cause such Registrable Securities to be qualified in such jurisdictions as such Holders may reasonable request, together with all or such portion of the Registrable Securities of any other Holders joining in such request as are specified in a request given within fifteen (15) days after receipt of such notice from the Company; provided that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.5:
1. if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $500,000;
2. if the Company has, within the twelve month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 1.5;
3. if the Company shall furnish to the Holders a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than sixty (60) days after receipt of the request of the Holder or Holders under this Section 1.5; provided that the Company shall not utilize this right more than once in any twelve (12) month period; provided, further, that the Company shall not register shares for its own account during such sixty (60) day period, but such prohibition shall not apply to the registration of Company shares in connection with (x) a merger or (y) registration of shares relating to a stock option, stock purchase or similar plan; or
4. in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance.
3. Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders.
5. Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:
1. except as otherwise provided in Section 1.3, prepare and file with the SEC a registration statement with respect to such Registrable Securities and use best efforts to cause such registration statement to become effective, and keep such registration statement effective for a period of up to two hundred seventy (270) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided that (i) such two hundred seventy (270) day period shall be extended for a period of time equal to (A) the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company and (B) the period of any suspension of use of such registration statement under the circumstances described in Section 1.6(f); and (ii) in the case of any registration of Registrable Securities on Form S-3 (or any other Form, to the extent permitted by law) that are intended to be offered on a continuous or delayed basis, such two hundred seventy (270) day period shall be extended, if necessary, to keep the Registration Statement effective until all such Registrable Securities are sold, except to the extent that the Holders (and any affiliate of the Holders with whom the Holders must aggregate their sales under Rule 144) of such Registrable Securities may sell those Registrable Securities in any three-month period without regard to the volume limitation and without registration in compliance with Rule 144 under the 1933 Act;
2. prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the 1933 Act with respect to the disposition of all securities covered by such registration statement during the period of time such registration statement remains effective;
3. furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request to facilitate the disposition of Registrable Securities owned by them;
4. use best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions;
5. in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering;
6. during the period of time such registration statement remains effective, immediately notify each Holder of Registrable Securities covered by such registration statement in writing at any time when (i) a prospectus relating thereto is required to be delivered under the 1933 Act or (ii) the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and in the case of clause (ii) above, the Holder shall suspend the use of the prospectus until its receipt of the written notice referred to in the last sentence of this Section 1.6(f). Notwithstanding the provisions of this Section 1.6, the Company may, during the period a registration statement is required to remain effective hereunder, suspend the use of the prospec tus for a period not to exceed sixty (60) days (whether or not consecutive) in any 12-month period if the Board of Directors of the Company determines in good faith that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and similar events, it is in the best interests of the Company to suspend such use, and prior to or contemporaneously with suspending such use the Company provides the Holders of Registrable Securities with written notice of such suspension (which notice need not specify the nature of the event giving rise to such suspension), and the Holder shall suspend the use of the prospectus until its receipt of the written notice referred to in the last sentence of this Section 1.6(f). At the end of any suspension period referred to in the first or second sentence of this Section 1.6(f), the Company shall immediately provide the Holders with written notic e of the termination of such suspension.
7. cause all such Registrable Securities registered hereunder to be listed on each securities exchange on which securities of the same class issued by the Company are then listed;
8. provide a transfer agent and registrar for all Registrable Securities registered hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and
9. furnish, at the request of any Holder, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus include d therein) and with respect to events subsequent to the date of the financial statements, as are customarily covered in accountants' letters delivered to the underwriters in underwritten public offerings of securities addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities.
6. Information from Holder. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding such Holder, the Registrable Securities held by such Holder, and the intended method of disposition of such securities as shall be required to effect the registration of such Registrable Securities.
7. Expenses of Registration. All expenses incurred in connection with registrations, filings or qualifications pursuant to this Section 1, including without limitation all registration, filing and qualification fees, printing fees and expenses, accounting fees and expenses, fees and disbursements of counsel for the Company and the fees and disbursements of one counsel for the selling Holders selected by the Holders, shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Sections 1.3 and 1.5 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based on the number of Registrable Securities that were requested to be included in the withdrawn registration); provided that, if at the time of such withdrawal, the Holders shall have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and shall have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Sections 1.3 and 1.5. Anything herein to the contrary notwithstanding, all underwriting discounts and commissions incurred in connection with a sale of Registrable Securities shall be borne and paid by the Holder thereof, and the Company shall have no responsibility therefor.
8. Indemnification. If any Registrable Securities are included in a registration statement under this Section 1:
1. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners or officers, directors and stockholders of such Holder, legal counsel and accountants for such Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the 1933 Act, the 1934 Act or any other federal or state securities law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements th ereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law; and the Company will reimburse such Holder, underwriter or controlling person for any legal or other expenses incurred, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided that the indemnity agreement in this Section 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent tha t it arises out of or is based on a Violation that occurs in reliance on and in conformity with written information furnished expressly for use in connection with such registration by such Holder, underwriter or controlling person.
2. To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who shall have signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities to which any of the foregoing persons may become subject, under the 1933 Act, the 1934 Act or any other federal or state securities law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance on and in conformity with written information furnished by such Holder expressly for use in connection with such regi stration; and each such Holder will reimburse any person intended to be indemnified pursuant to this Section 1.9(b), for any legal or other expenses reasonably incurred, as incurred, by such person in connection with investigating or defending any such loss, claim, damage, liability or action; provided that the indemnity agreement in this Section 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld or delayed); and provided further that in no event shall any indemnity by such Holder under this Section 1.9(b), when aggregated with amounts contributed, if any, pursuant to Section 1.9(d), exceed the net proceeds from the sale of Registrable Securities hereunder received by such Holder.
3. Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent that the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to notify the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to notify the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9.
4. If the indemnification provided in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that shall have resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations; provided that in no event shall any contribution by a Holder under this Section 1.9(d), when aggregate with amounts paid, if any, pursuant to Section 1.9(b), exceed the net proceeds from the sale of Registrable Securities hereu nder received by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.
5. Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.
6. The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise.
9. Reports under 1934 Act. With a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration statement (including, without limitation, Form S-3), the Company agrees to:
1. make and keep public information available, as those terms are used in SEC Rule 144, at all times;
2. take such action as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities;
3. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; and
4. furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith on request, (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the 1933 Act and the 1934 Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration or pursuant to such form.
10. Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such Registrable Securities that (i) is a subsidiary, parent, current or former partner, current or former limited partner, current or former member, current or former manager or stockholder of a Holder, (ii) is an entity controlling, controlled by or under common control with a Holder, including without limitation a corporation or limited liability company that is a direct or indirect parent or subsidiary of the Holder, (iii) is a transferee or assignee of a Holder and the number of shares representing or underlying the Registrable Securities (whether in the form of shares, warrants to purchase shares, or a combination of the foregoing) transferred or assigned constitute at least 500,000 shares of Registrable Securities held by such Holder (as adjusted for stock split, combinations, dividends and the like); provided that: (a) the Company is, within a reasonable time after such transfer, notified of the name and address of such transferee or assignee and the Registrable Securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement; (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act; and (d) such assignment is not made pursuant to a registration statement effected pursuant to this Agreement.
11. Duplicative Registration Rights. The rights of the Investors under Section 1.4 or Section 1.5 shall not apply to the extent that Registrable Securities then held by the Investors are already covered by an effective registration statement under Section 1.3 or any other Section of this Agreement.
12. Termination of Registration Rights. No Holder shall be entitled to exercise any right provided in this Section 1 with respect to a Registrable Security (i) after the date on which that Registrable Security has been sold under a registration statement filed in accordance with this Agreement or (ii) if all Registrable Securities held by such Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three-month period without volume limitation and without registration in compliance with Rule 144 under the 1933 Act.
2. Covenants.
0. Reserve for Exercise Shares. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock such number of shares (the "Exercise Shares") as shall be sufficient to enable it to comply with its exercise obligations under the Registration Warrants. If at any time the number of Exercise Shares shall not be sufficient to effect the exercise of the Registration Warrants, the Company will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number as will be sufficient for such purposes. The parties acknowledge that the Company currently does not have any authorized but unissued shares of Common Stock available for issuance and the Company hereby agrees to use its best efforts to take action to call a shareholders meeting and increase its authorized but unissued Common Stock as soon as practicable. The Company will obtain authorization, consent, approv al or other action by, or make any filing with, any administrative body that may be required under applicable state securities laws in connection with the issuance of Exercise Shares.
1. Confidential Information. The Company shall provide to each Holder not less than ten days' prior written notice of its intention to deliver to such Holder confidential or non-public information relating to the Company and shall mark such information as "confidential" or "non-public." If a Holder notifies Company that it does not desire to receive such confidential or non-public information, then the Company shall not deliver such information to such Holder. Whether or not a Holder has so notified the Company, such Holder may, in its sole discretion, decline to receive from the Company such confidential or non-public information, and as a result thereof shall not be deemed to have received or have any knowledge of such confidential or non-public information; provided that it has not received the same or promptly returns the same upon receipt by such Holder.
3. Miscellaneous.
0. Successors and Assigns. Except as otherwise provided herein, this Agreement shall inure to the benefit of and bind the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer on any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
1. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Washington, without giving effect to its conflicts of law principles. All disputes between the parties hereto arising out of or in connection with this Agreement or the Registrable Securities, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above-referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non conveniens. Notwithstanding the foregoing, any party obtaining an order or judgment in any of the above-referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.
2. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
3. Headings. The headings of sections and subsections in this Agreement are used for convenience of reference only and are not to be considered in construing or interpreting this Agreement.
4. Notices. Any request, consent, notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed duly given and received when delivered personally or transmitted by facsimile, one business day after being deposited for next-day delivery with a nationally recognized overnight delivery service, or three business days after being deposited as first class mail with the United States Postal Service, all charges or postage prepaid, and properly addressed to the party to receive the same at the address for such party indicated on the signature page hereof or at such other address as such party may designate by advance written notice to the other parties.
5. Expenses. If any action at law or in equity is necessary to enforce or interpret any of the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and disbursements in addition to any other relief to which such party may be entitled. In addition, the Company shall pay the reasonable attorneys' fees, costs and disbursements of the Investors in enforcing any terms of this Agreement, whether or not any action at law or in equity is brought.
6. Entire Agreement: Amendments and Waivers. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subject matter hereof. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the consent of the Company and the holders of more than 66-2/3% of the Registrable Securities; provided that no amendment shall be effective against any holder or holders of Registrable Securities that would be affected adversely and affected differently from the Holders generally by such amendment, without the consent of such holder or holders. Any amendment or waiver effected in accordance with this Section 3.7 shall be binding on the Company, each holder of any Registrable Securities and each future holder of all such Registrable Securities.
7. Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

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IN WITNESS WHEREOF, this Registration Rights Agreement has been duly executed by or on behalf of the parties hereto as of the date first above written.

"Company"

AURA SYSTEMS, INC.

By:

Name:

Title:

2335 Alaska Avenue

El Segundo, CA 90245

Attn: President

Fax: (310) 643-8719

"Investors"

KOYAH MICROCAP PARTNERS MASTER

FUND, L.P.

By: Koyah Ventures LLC, its general partner

By:

Name:

Title:

c/o ICM Asset Management, Inc.
601 West Main Avenue, Suite 600
Spokane, WA 99201
Attn: Robert Law

Fax: (509) 444-4500

[Signature page to Registration Rights Agreement (Intercreditor #3)]

I:\Spodocs\28601\00024\agree\00288036.DOC:lg

EXHIBIT A

Form of Registration Warrant

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

Warrant To Purchase Common Stock

Of

Aura Systems, Inc.

______________, ______

No. W-__

This certifies that __________________________ (the "Holder") is entitled, subject to the terms and conditions of this Warrant, to purchase from AURA SYSTEMS, INC., a Delaware corporation (the "Company"), all or any part of an aggregate of ______________ shares of the Company's authorized and unissued Common Stock, par value $.005 (the "Warrant Stock"), at the Warrant Price (as defined herein), upon surrender of this Warrant at the principal offices of the Company, together with a duly executed subscription form in the form attached hereto as Exhibit 1 and simultaneous payment of the Warrant Price for each share of Warrant Stock so purchased in lawful money of the United States, unless exercised in accordance with the provisions of Section 2.5 of this Warrant. The Holder may exercise the Warrant at any time after the date of this Warrant and prior to the seventh anniversary of the date hereof (the "Expiration Date").

This Warrant is issued pursuant to the Registration Rights Agreement dated as of December 23, 2004 (the "Registration Rights Agreement"), by and among the Company and the Investors named therein.

1. Definitions. The following definitions shall apply for purposes of this Warrant:

1.1 "Acquisition" means any consolidation, merger or reorganization of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent of the Company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent of the Company's voting power is transferred, excluding any consolidation, merger or reorganization effected exclusively to change the domicile of the Company.

1.2 "Asset Transfer" means a sale, lease or other disposition of all or substantially all of the assets of the Company.

1.3 "Company" means the "Company" as defined above and includes any corporation or other entity that succeeds to or assumes the obligations of the Company under this Warrant.

1.4 "Common Stock" means the Common Stock, par value $.005, of the Company.

1.5 "Fair Market Value" of a share of Warrant Stock means (i) if the Common Stock is traded on a securities exchange, the average of the closing price on each trading day over the ten consecutive trading day period ending three trading days before the day the Fair Market Value of the securities is being determined, (ii) if the Common Stock is actively traded over-the counter, the average of the closing bid and asked prices quoted on the NASDAQ system (or similar system) on each trading day over the five consecutive trading day period ending one trading day before the day the Fair Market Value of the securities is being determined, or (iii) if at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, then the Fair Market Value determined by the Company's Board of Directors in good faith.

1.6 "Holder" means the "Holder" as defined above and includes any transferee who shall at the time be the registered holder of this Warrant.

1.7 "Warrant" means this Warrant and any warrant(s) delivered in substitution or exchange therefor, as provided herein.

1.8 "Warrant Price" means $.02 per share of Warrant Stock. The Warrant Price is subject to adjustment as provided herein.

1.9 "Warrant Stock" means the Common Stock. The number and character of shares of Warrant Stock are subject to adjustment as provided herein and the term "Warrant Stock" shall include stock and other securities and property at any time receivable or issuable upon exercise of this Warrant in accordance with its terms.

2. Exercise.

2.1 Method of Exercise. Subject to the terms and conditions of this Warrant, the Holder may exercise the purchase rights represented by this Warrant in whole or in part, at any time or from time to time, on or after the date hereof and before the Expiration Date, by surrendering this Warrant at the principal offices of the Company, with the subscription form attached hereto duly executed by the Holder, and payment of an amount equal to the product obtained by multiplying (i) the number of shares of Warrant Stock so purchased by (ii) the Warrant Price, as specified in Section 2.2 below.

2.2 Form of Payment. Except as provided in Section 2.5, payment may be made by (i) a check payable to the Company's order, (ii) wire transfer of funds to the Company, (iii) cancellation of indebtedness of the Company to the Holder, or (iv) any combination of the foregoing.

2.3 Partial Exercise. Upon a partial exercise of this Warrant, this Warrant shall be surrendered by the Holder and replaced with a new Warrant or Warrants of like tenor for the balance of the shares of Warrant Stock purchasable under the Warrant surrendered upon such purchase. The Warrant or Warrants will be delivered to the Holder thereof within a reasonable time.

2.4 No Fractional Shares. No fractional shares may be issued upon any exercise of this Warrant. If upon any exercise of this Warrant a fraction of a share results, such fraction shall be rounded upwards or downwards to the nearest whole number.

2.5 Net Exercise Election. The Holder may elect to convert all or a portion of this Warrant, without the payment by the Holder of any additional consideration, by the surrender of this Warrant or such portion to the Company, with the net exercise election selected in the subscription form attached hereto duly executed by the Holder, into the number of shares of Warrant Stock that is obtained under the following formula:

X = Y (A-B)

A

where X = the number of shares of Warrant Stock to be issued to the Holder pursuant to this Section 2.5.

Y = the number of shares of Warrant Stock purchasable under this Warrant, or if only a portion of the Warrant is being exercised, the number of shares of Warrant Stock represented by the portion of the Warrant being exercised.

A = the Fair Market Value of one share of Warrant Stock at the time the net exercise election is made pursuant to this Section 2.5.

B = the Warrant Price.

2.6 Condition of Exercise. As a condition to any exercise of this Warrant, the Holder shall represent and warrant as to its status as an "accredited investor" under the Securities Act of 1933, as amended (the "Act"), by delivering the subscription form attached hereto (together with the appendix attached thereto).

3. Issuance of Stock. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Warrant Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As soon as practicable, but in any event no later than three days after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of whole shares of Warrant Stock issuable upon such exercise. The Company covenants and agrees that all shares of Warrant Stock that are issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder, free of all taxes, liens and charges with resp ect to the issue thereof and free and clear of any restrictions on transfer (other than under the Act and state securities laws).

1. Adjustment Provisions. The number and character of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities or property at the time receivable or issuable upon exercise of this Warrant) and the Warrant Price for the Common Stock are subject to adjustment upon the occurrence of the following events between the date this Warrant is issued and the date it is exercised:
0. Adjustment for Stock Splits, Stock Dividends, Recapitalizations, etc. The Warrant Price of this Warrant and the number of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall each be appropriately and proportionally adjusted to reflect any stock dividend, stock split, reverse stock split, combination of shares, reclassification, recapitalization or other similar event affecting the number of outstanding shares of Warrant Stock (or such other stock or securities).
1. Adjustment for Other Dividends and Distributions. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution payable with respect to the Warrant Stock that is payable in (a) securities of the Company (other than issuances with respect to which adjustment is made under Section 4.1), or (b) assets (other than cash dividends paid or payable solely out of retained earnings), then, and in each such case, the Holder, upon exercise of this Warrant at any time after the consummation, effective date or record date of such event, shall receive, in addition to the shares of Warrant Stock issuable upon such exercise prior to such date, the securities or such other assets of the Company to which the Holder would have been entitled upon such date if the Holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in thi s Warrant).
2. Adjustment for Reorganization, Consolidation, Merger. In case of any reorganization of the Company (or of any other corporation or entity, the stock or other securities of which are at the time receivable on the exercise of this Warrant), after the date of this Warrant, or in case, after such date, the Company (or any such corporation or entity) shall consolidate with or merge into another corporation or entity or convey all or substantially all of its assets to another corporation or entity, then, and in each such case, the Holder, upon the exercise of this Warrant (as provided in Section 2), at any time after the consummation of such reorganization, consolidation, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of this Warrant prior to such consummation, the stock or other securities or property to which the Holder would have been entitled upon the consummation of such reorgan ization, consolidation, merger or conveyance if the Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in this Warrant, and the successor or purchasing corporation or entity in such reorganization, consolidation, merger or conveyance (if other than the Company) shall duly execute and deliver to the Holder a supplement hereto acknowledging such corporation's or entity's obligations under this Warrant; and in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after the consummation of such reorganization, consolidation, merger or conveyance.
3. Notice of Certain Events and Adjustments. The Company shall give thirty days prior written notice of the record date fixed for any Acquisition, Asset Transfer or event referred to in Section 4.2 or 4.3. The Company shall promptly give written notice of each adjustment or readjustment of the Warrant Price or the number of shares of Warrant Stock or other securities issuable upon exercise of this Warrant. The notice shall describe the adjustment or readjustment and show in reasonable detail the facts on which the adjustment or readjustment is based.
4. No Change Necessary. The form of this Warrant need not be changed because of any adjustment in the Warrant Price or in the number of shares of Warrant Stock issuable upon its exercise.
2. No Rights or Liabilities as Stockholder. This Warrant does not by itself entitle the Holder to any voting rights or other rights as a stockholder of the Company. In the absence of affirmative action by the Holder to purchase Warrant Stock by exercise of this Warrant, no provisions of this Warrant, and no enumeration herein of the rights or privileges of the Holder, shall cause the Holder to be a stockholder of the Company for any purpose.
3. Attorneys' Fees. The Company shall pay the reasonable attorneys' fees, costs and disbursements of the Holder in enforcing any terms of this Warrant, whether or not any action at law or in equity is brought.
4. Transfer. This Warrant may be transferred or assigned by the Holder hereof in whole or in part, if, on the Company's reasonable request, the Holder provides an opinion of counsel reasonably satisfactory to the Company that such transfer does not require registration under the Act and the applicable state securities law, except that this Warrant may be transferred by a Holder which is a partnership or limited liability company to a partner, former partner, member, former member or other affiliate of such partnership or limited liability company, as the case may be, if (a) the transferee agrees in writing to be subject to the terms of this Warrant and (b) the Holder delivers notice of such transfer to the Company. The rights and obligations of the Company and the Holder under this Warrant shall be binding upon and inure to the benefit of their respective permitted successors, assigns, heirs, administrators and transferees.
5. Loss or Mutilation. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership and the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to it, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver in lieu thereof a new Warrant of like tenor.
6. Reservation of Warrant Stock. If at any time the number of authorized but unissued shares of the Warrant Stock shall not be sufficient to effect the exercise of this Warrant, the Company shall take all such corporate action as may be necessary to increase its authorized but unissued shares of the Warrant Stock to such number of shares of the Warrant Stock as shall be sufficient for such purpose. The parties acknowledge that the Company currently does not have any shares of the Warrant Stock available for issuance and the Company hereby agrees to use its best efforts to take action to call a stockholder meeting and increase its authorized but unissued Warrant Stock as soon as practicable.
7. Governing Law. This Warrant shall be governed by and construed and interpreted in accordance with the laws of the State of Washington, without giving effect to its conflicts of law principles. All disputes between the parties hereto arising out of or in connection with this Warrant or the Warrant Stock, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above-referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non conveniens. Notwithstanding the foregoing, any party obtaining an order or judgment in any of the above-referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.
8. Headings. The headings and captions used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant. All references in this Warrant to sections and exhibits shall, unless otherwise provided, refer to sections hereof and exhibits attached hereto, all of which exhibits are incorporated herein by this reference.
9. Notices. Any request, consent, notice or other communication required or permitted under this Warrant shall be in writing and shall be deemed duly given and received when delivered personally or transmitted by facsimile, one business day after being deposited for next-day delivery with a nationally recognized overnight delivery service, or three business days after being deposited as first class mail with the United States Postal Service, all charges or postage prepaid, and properly addressed to the party to receive the same at the address for such party indicated in the Registration Rights Agreement or at such other address as such party may have designated by advance written notice to the other party.
10. Amendment; Waiver. Any term of this Warrant may be amended and the observance of any term of this Warrant may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder in the case of an amendment and only with the written consent of the waiving party in the case of a waiver.
11. Severability. If one or more provisions of this Warrant are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Warrant and the balance of the Warrant shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms.
12. Terms Binding. By acceptance of this Warrant, the Holder accepts and agrees to be bound by all the terms and conditions of this Warrant.
13. Valid Issuance; Taxes. All shares of Warrant Stock issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable, and the Company shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof. The Company shall not be required to pay any transfer tax or other similar charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Warrant Stock in any name other than that of the Holder of this Warrant.
14. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of Warrant Stock issuable upon the exercise of this Warrant above the amount payable therefor upon such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Warrant Stock upon exercise of this Warrant .

[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the date and year first set forth above.

AURA SYSTEMS, INC.

By:

Name: ______________________________

Title: _______________________________

[Signature Page to Warrant]

Exhibit 1

FORM OF SUBSCRIPTION

(To be signed only upon exercise of Warrant)

To: Aura Systems, Inc.

(1) Check the box that applies and the provide the necessary information:

o Cash Payment Election. The undersigned Holder hereby elects to purchase shares of Common Stock of Aura Systems, Inc. (the "Warrant Stock"), pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full.

o Net Exercise Election. The undersigned Holder elects to convert the Warrant into shares of Warrant Stock by net exercise election pursuant to Section 2.5 of the Warrant. This conversion is exercised with respect to __________ shares of Common Stock of Aura Systems, Inc. (the "Warrant Stock") covered by the Warrant.

(2) In exercising the Warrant, the undersigned Holder hereby makes the representations and warranties set forth on Appendix A hereto as of the date hereof.

(3) Please issue a certificate or certificates representing such shares of Warrant Stock in the name or names specified below:

(Name) (Name)

(Signature) (Signature)

(Address) (Address)

(City, State, Zip Code) (City, State, Zip Code)

(Federal Tax Identification Number) (Federal Tax Identification Number)

(Date) (Date)

Appendix A

INVESTMENT REPRESENTATION

The undersigned, _____________________ (the "Holder"), intends to acquire shares of Common Stock (the "Common Stock") of Aura Systems, Inc. (the "Company") from the Company pursuant to the exercise or conversion of a Warrant to purchase Common Stock held by the Holder. The Common Stock will be issued to the Holder in a transaction not involving a public offering and pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws. In connection with such purchase and in order to comply with the exemptions from registration relied upon by the Company, the Holder represents, warrants and agrees as follows:

(a) The Holder is acquiring the Common Stock for its own account, to hold for investment, and the Holder shall not make any sale, transfer or other disposition of the Common Stock in violation of the Securities Act or the General Rules and Regulations promulgated thereunder by the Securities and Exchange Commission or in violation of any applicable state securities law. The Holder is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act.

(b) The Holder has been advised that the Common Stock has not been registered under the Securities Act or state securities laws on the ground that this transaction is exempt from registration, and that reliance by the Company on such exemptions is predicated in part on the Holder's representations set forth herein.

(c) The Holder has been informed that under the Securities Act, the Common Stock must be held indefinitely unless it is subsequently registered under the Securities Act or unless an exemption from such registration (such as Rule 144) is available with respect to any proposed transfer or disposition by the Holder of the Common Stock. The Holder further agrees that the Company may refuse to permit the Holder to sell, transfer or dispose of the Common Stock (except as permitted under Rule 144) unless there is in effect a registration statement under the Securities Act and any applicable state securities laws covering such transfer, or unless the Holder furnishes an opinion of counsel reasonably satisfactory to counsel for the Company to the effect that such registration is not required.

The Holder also understands and agrees that there will be placed on the certificate(s) for the Common Stock or any substitutions therefor, a legend stating in substance:

"The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws. These shares have been acquired for investment purposes and may not be sold or otherwise transferred in the absence of an effective registration statement for these shares under the Securities Act and applicable state securities laws or an opinion of counsel satisfactory to the Company that registration is not required and that an applicable exemption is available."

I:\Spodocs\28601\00024\agree\00288036.DOC:lg

EX-10

AGREEMENT

THIS AGREEMENT (this "Agreement") is entered into as of December 23, 2004 between AURA SYSTEMS, INC., a Delaware corporation (the "Company"), and KOYAH MICROCAP PARTNERS MASTER FUND, L.P., a Cayman Islands limited partnership (the "Lender").

WHEREAS, in connection with secured loans to the Company by the Lender, the Company and the Lender previously entered into an Agreement (the "Prior Agreement"), a Convertible Promissory Note (the "Prior Note"), a Security Agreement (the "Prior Security Agreement"), a Stock Pledge Agreement (the "Prior Stock Pledge Agreement") and a Registration Rights Agreement (the "Prior Registration Rights Agreement"), each dated as of December 16, 2004 (collectively, the "Prior Transaction Documents");

WHEREAS, the Company has requested that the Lender make additional advances to the Company;

WHEREAS, in order to induce the Lender to make such advances and in connection with the Company and the Lender entering into the New Transaction Documents (as defined below), the parties wish to provide for certain related matters, on the terms and conditions set forth herein;

WHEREAS, in addition to this Agreement, the Company will be executing and delivering an additional Convertible Promissory Note (the "New Note" and together with the Prior Note, the "Notes") and an additional Registration Rights Agreement (the "New Registration Rights Agreement" and together with the Prior Registration Rights Agreement, the "Registration Rights Agreements"), each dated as of the date hereof (collectively, the "New Transaction Documents" and together with the Prior Transaction Documents, the "Transaction Documents");

WHEREAS, the Company also has outstanding secured loans with (i) Koyah Partners, L.P., a Delaware limited partnership ("Koyah"), (ii) Koyah Leverage Partners, L.P., a Delaware limited partnership ("Koyah Leverage"), (iii) Raven Partners, L.P., a Delaware limited partnership ("Raven") and (iv) Koyah Ventures LLC, a Delaware limited liability company ("Ventures") (collectively, the "Prior Lenders");

NOW, THEREFORE, for valuable consideration, the receipt of which is hereby acknowledged, the parties do hereby agree as follows:

1. Representations and Warranties of the Company. The Company hereby represents and warrants to the Lender as follows:

(a) The Company (i) is a corporation duly organized, validly existing and in good standing under the laws of Delaware; (ii) has the power and authority to own, lease and operate its properties and carry on its business as now conducted; and (iii) is duly qualified, licensed to do business and in good standing under any foreign corporation laws in each jurisdiction where the failure to be so qualified or licensed could reasonably be expected to have a material adverse effect on the business, assets, operations, prospects or financial or other condition of the Company.

(b) The execution, delivery and performance of the Transaction Documents by the Company and the performance and consummation by the Company of the transactions contemplated in the Transaction Documents have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize the Transaction Documents or the performance or consummation of any of the transactions contemplated thereby.

(c) The Transaction Documents have been duly executed and delivered by the Company and constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability may be limited by bankruptcy and other laws affecting the rights and remedies of creditors generally and general principles of equity.

(d) The Company has taken or will take all necessary corporate action to authorize and reserve for issuance and to permit it to issue, upon conversion of the Notes, the shares issuable upon such conversion; all of such shares, upon their issuance and delivery in accordance with the terms of the Notes, will be validly issued, fully paid and nonassessable.

(e) The execution and delivery by the Company of the Transaction Documents and the performance and consummation of the transactions contemplated thereby, do not and will not: (i) violate the Company's Articles of Incorporation or Bylaws ("Charter Documents") or any material judgment, order, writ, decree, statute, rule or regulation applicable to the Company; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other person or entity to accelerate (whether after the giving of notice or lapse of time or both), any material mortgage, indenture, agreement, instrument or contract to which the Company is a party or by which it is bound; or (iii) result in the creation or imposition of any lien upon any property, asset or revenue of the Company or the suspension, revocation, impairment, forfeiture, or non-renewal of any material permit, license, authorization or approval applicable to the Company, its business or operations, or any of its assets or properties.

(f) No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or other person or entity (including, without limitation, the shareholders of any person or entity) is required in connection with the execution and delivery of the Transaction Documents by the Company and the performance and consummation of the transactions contemplated thereby.

(g) The Company is not in violation of or in default with respect to: (i) the Charter Documents or any material judgment, order, writ, decree, statute, rule or regulation applicable to the Company; or (ii) any material mortgage, indenture, agreement, instrument or contract to which such person or entity is a party or by which it is bound (nor is there any waiver in effect which, if not in effect, would result in such a violation or default). Notwithstanding the foregoing, the Lender waives any breach of this representation and warranty arising from the existing defaults listed under the heading "Defaults" in the attached Schedule of Exceptions, so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement. In addition, the Lender also waives an y breach of this representation and warranty arising from any other defaults referred to in the Company's Form 10-Q for the quarter ended November 30, 2003, so long as any creditor involved in such defaults takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement; it being understood, however, that this waiver is for the purpose of acknowledging the existence of such other defaults and for waiving them under this Section 1(g) only, but this waiver shall not apply to Section 13(b) of the Notes or any other provisions of the Transaction Documents or the Lender's rights and remedies with respect to such provisions.

(h) No actions (including, without limitation, derivation actions), suits, proceeds or investigations are pending or, to the knowledge of the Company, threatened against the Company at law or in equity in any court or before any other governmental authority that if adversely determined would: (i) (alone or in the aggregate) have a material adverse effect on the business, assets, operations, prospects or financial or other condition of the Company or (ii) enjoin, either directly or indirectly, the execution, delivery or performance by the Company of the Transaction Documents or the transactions contemplated thereby. Notwithstanding the foregoing, the Lender waives any breach of this representation and warranty arising from any actions or suits referred to in the Company's Form 10-Q for the quarter ended November 30, 2003, so long as any party involved in such actions or suits takes no further actions and exercises no further remedies to collect on the obligations involved or enfo rce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement; it being understood, however, that this waiver is for the purpose of acknowledging the existence of such actions or suits and for waiving them under this Section 1(h) only, but this waiver shall not apply to Section 13(b) of the Notes or any other provisions of the Transaction Documents or the Lender's rights and remedies with respect to such provisions.

(i) The Company owns and has good and marketable title or a valid leasehold interest in all assets and properties as reflected in the most recent financial statements delivered to the Lender and all assets and properties acquired by the Company since such date, free and clear of liens and encumbrances except for liens in favor of the Prior Lenders. Notwithstanding the foregoing, the Lender waives any breach of this representation and warranty arising from the existing liens listed under the heading "Liens" in the attached Schedule of Exceptions, so long as any creditor holding such lien takes no further actions and exercises no further remedies to collect on the obligations involved or enforce its related rights and the Company otherwise remains in compliance with all of the provisions of the Transaction Documents and this Agreement.

(j) The Company owns or possesses sufficient legal rights to all patents, patent applications, trademarks, service marks, trademark and service mark applications, trade names, copyrights, trade secrets, licenses, information, processes and other intellectual property rights ("Intellectual Property Rights") necessary for its business as now conducted and as proposed to be conducted, free and clear of any liens or encumbrances and without any conflict with, or infringement of the rights of, others.

(k) The financial statements of the Company that have been delivered to the Lender: (i) are in accordance with the books and records of the Company, which have been maintained in accordance with good business practices; (ii) have been prepared in conformity with accounting principles generally accepted in the United States; and (iii) fairly present the consolidated financial position of the Company as of the dates presented therein and the results of operations, changes in financial positions or cash flows, as the case may be, for the periods presented therein. The Company does not have any contingent obligations, liability for taxes or other outstanding obligations that are material in the aggregate, except as disclosed in such financial statements. Since the date of such financial statements, there has been no material adverse change in the financial position, business, operations, assets, liabilities or prospects of the Company, except as listed in the attached Schedule of Ex ceptions.

(l) The Company has total assets in excess of $2,000,000 according to its most recent financial statements, which are dated not more than ninety (90) days prior to the date of this Agreement and the loans contemplated hereby and were prepared (i) in accordance with generally accepted accounting principles (and on a consolidated basis if the Company has consolidated subsidiaries) or (ii) in accordance with the rules and requirements of the Securities and Exchange Commission, whether or not required by law to be prepared in accordance with those rules and requirements. The Company, and its officers and directors, have a preexisting business relationship with the Lender.

(m) All reports required to be filed by the Company since and including the filing of the Company's Form 10-K for the fiscal year ended February 28, 2003 (collectively, the "SEC Reports") have been duly filed with the Securities and Exchange Commission, except certain of the SEC Reports were filed late. Except as set forth in the Schedules of Exceptions attached to this Agreement, the Notes and the Prior Security Agreement: as of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder applicable to the SEC Reports; none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were m ade, not misleading; and the financial statements of the Company included in the SEC Reports complied as of their respective dates of filing in all material respects with applicable accounting requirements and the published rules and regulations of the Securities and Exchange Commission with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of unaudited statements, as permitted by Regulation S-X promulgated by the Securities and Exchange Commission) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto), and fairly present the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

(n) The Company has timely received all of the subscription amounts and installment payments that are scheduled to be received as of the date hereof in the Company's $5,000,000 minimum/$15,000,000 maximum Series B Cumulative Convertible Preferred Stock financing (the "Series B Financing"), except as otherwise noted in the information recently provided by the Company to Lender.

(o) A complete list of all of the investors in the Series B Financing with outstanding subscription amounts or installment payments as of the date hereof is contained in the information recently provided by the Company to Lender.

(p) The sale of the Company's El Segundo facilities by the Company and its majority-owned subsidiary Aura Realty, Inc. to David Maimon and Yair Ben Moshe, on the terms contemplated in the Securities Purchase Agreement dated as of August 19, 2004 (the "Securities Purchase Agreement") among the Company and the Purchasers named therein, is in its final phase and is scheduled to close not later than January 10, 2005. The Company is not aware of any major contingencies which have not yet been waived or satisfied or any complications or problems that could prevent or delay such sale, and the Company reasonably believes that such sale will occur on such terms and within such time.

(q) The Company has settled claims held by, and received full releases from, the Company's creditors listed in the information recently provided by the Company to Lender. The remaining creditors listed in the information recently provided by the Company to Lender are out of business.

(r) The Company's current cash flow projections for the period December 2004 through March 2005 are contained in the information recently provided by the Company to Lender, and the Company has good and sufficient grounds for believing that such projections are a reasonable forecast of its cash flow situation during such period.

2. Company Acknowledgements. The Company confirms, acknowledges and agrees that (i) the Prior Security Agreement and the Prior Stock Pledge Agreement secure all of the Company's obligations under the Transaction Documents, (ii) the Lender is under no obligation to make any further advances to the Company under the Notes, to grant any extension of the maturity date of the Notes or, except as otherwise specifically provided in the Notes, to convert any loans outstanding under the Notes into equity, and (iii) any further advances to the Company by the Lender under the Notes, any extension by the Lender of the maturity date of the Notes, any conversion of loans outstanding under the Notes into equity (except as otherwise specifically provided in the Notes), or any other financing of the Company by the Lender or its affiliates, are at the option of the Lender and its affiliates, in their sole discretion.

3. Further Assurance. The representations and warranties of the Company contained in this Agreement include, among others, a representation and warranty that the execution, delivery and performance by the Company of this Agreement and the other Transaction Documents and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company's Board of Directors. As a further assurance to the Lender with respect to such representation and warranty, the Company shall deliver to the Lender, within five (5) business days after request of the Lender, evidence satisfactory to the Lender in its sole discretion of the authorization by the Company's Board of Directors of the execution, delivery and performance by the Company of this Agreement and the other Transaction Documents and the consummation by the Company of the transactions contemplated hereby and thereby.

4. Survival. The representations and warranties and the covenants of the Company contained in this Agreement shall survive the closing of the transactions contemplated by the Transaction Documents.

5. Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Lender in the case of an amendment and only with the written consent of the waiving party in the case of a waiver.

6. Entire Agreement. This Agreement, together with the other Transaction Documents, constitute the entire agreement of the parties concerning the subject matter hereof and thereof, all prior discussions, proposals, negotiations and understandings having been merged herein and therein.

7. Intercreditor Agreement. The terms and conditions of this Agreement and the other Transaction Documents shall also be governed by and subject to the terms and conditions of an Intercreditor Agreement dated as of January 19, 2004, as supplemented by a Joinder Agreement dated as of June 14, 2004 and a further Joinder Agreement dated as of December 16, 2004, among the Company, the Prior Lenders and Lender (collectively, the "Intercreditor Agreement").

8. Successors. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company and the Lender. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

9. Severability. If any part of this Agreement is determined to be illegal or unenforceable, all other parts shall remain in full force and effect.

10. Attorneys' Fees. The Company shall pay the reasonable attorneys' fees, costs and disbursements of the Lender in enforcing any terms of this Agreement, whether or not any action at law or in equity is brought.

11. Governing Law. Consistent with the governing law and venue provisions of the Intercreditor Agreement, this Agreement shall be governed by and construed and interpreted in accordance with the law of the State of Washington, without regard to that state's conflict of laws principles. All disputes between the parties hereto, whether sounding in contract, tort, equity or otherwise, shall be resolved only by state and federal courts located in Spokane, Washington, and the courts to which an appeal therefrom may be taken. All parties hereto waive any objections to the location of the above referenced courts, including but not limited to any objection based on lack of jurisdiction, improper venue or forum non-conveniens. Notwithstanding the foregoing, any party obtaining any order or judgment in any of the above referenced courts may bring an action in a court in another jurisdiction in order to enforce such order or judgment.

12. Miscellaneous. Any notice under this Agreement shall be given in writing and shall be addressed to the party to be notified at the address indicated below, or at such other address as such party may designate by written notice to the other party.

Aura Systems, Inc.
2335 Alaska Avenue
El Segundo, CA 90245
Attn: Raymond Yu

Fax: 310-643-8719

Koyah Microcap Partners Master Fund, L.P.

c/o ICM Asset Management, Inc.

601 W. Main Avenue, Suite 600

Spokane, WA 99201

Attn: Robert Law

Fax: 509-444-4500

13. Lender's Legal Fees and Expenses.

(a) The Company shall pay the costs and expenses of legal counsel to the Lender in connection with (i) the evaluation of loans to the Company, (ii) the negotiation, execution and delivery of this Agreement, the other Transaction Documents and any other related agreements with the Lender as well as the consummation of the transactions contemplated by such agreements, the administration of such agreements and any amendments or waivers of such agreements, (iii) the preparation and completion of any secured loan, securities and other filings necessary or appropriate in connection therewith and (iv) the evaluation, discussion and negotiation by the Lender, as debt or equity holder of the Company, of any financing, sale or similar proposals or expressions of interest involving the Company which may be made or advanced by any persons or entities (including without limitation the Lender or its affiliates) and the negotiation, execution and delivery of any related agreements as well as the consummation of the transactions contemplated thereby. The Company shall pay such costs and expenses immediately upon submittal. Alternatively, (x) the Lender may hold back and deduct up to $10,000 from the proceeds of the loan when disbursing such loan to be applied against some or all of such costs and expenses under this Section 13(a) and/or reimbursement of costs and expenses under Section 13(b), in which case such holdback shall constitute principal advanced under the New Note and/or (y) pay such costs and expenses directly, in which case the amounts so paid shall constitute additional amounts payable by the Company under this Agreement and the New Note, bear interest at the rate set forth in the New Note and be payable in cash only. Notwithstanding that the Company is paying such costs and expenses, the Company acknowledges and agrees that such legal counsel is representing only the Lender, and not the Company.

(b) In addition, the Lender and its affiliates (including without limitation Koyah Leverage, Koyah, Raven, Ventures and ICM Asset Management, Inc.), as well as the partners, directors, officers, shareholders, members, employees or agents thereof, shall be entitled to reimbursement of, and immediately upon submittal the Company shall pay, the legal fees and expenses incurred by the foregoing parties in connection with any threatened or actual action, suit, claim, proceeding or investigation arising out of any assertion that the promissory notes or other agreements or documents between the Company and the foregoing parties as well as the consummation of the transactions contemplated thereby (the "Agreements and Transactions") result in any purchase or sale or other acquisition or disposition of an equity security or a derivative security (a "Section 16 Event") within the meaning of, and for purposes of, Section 16 of the Securities Act of 1934, as amended, and the rules and regula tions promulgated thereunder ("Section 16"), unless it shall ultimately be determined by final judicial decision (from which there is no further right of appeal) that the Agreements and Transactions did result in a Section 16 Event and in liability under Section 16 ("Section 16 Liability") on the part of the foregoing party as a result thereof.

Furthermore, the foregoing parties shall be entitled to receive, and immediately upon submittal the Company shall pay, an advancement of expenses in advance of the final disposition of any such action, suit, claim, proceeding or investigation. Such advancement of expenses shall be made upon delivery to the Company of an undertaking on the part of the foregoing parties to repay the amounts so advanced if it shall ultimately be determined by final judicial decision (from which there is no further right of appeal) that the Agreements and Transactions did result in a Section 16 Event and in Section 16 Liability on the part of the foregoing party as a result thereof. In the event the foregoing parties pay such costs and expenses directly, the amounts so paid shall constitute additional amounts payable by the Company under their respective Agreements and Convertible Promissory Notes, bear interest at the rate set forth in such Convertible Promissory Notes, and be payable in cash only.

The provisions of this Section 13(b) are specifically intended to be for the benefit of each of the foregoing parties, who are intended to be third-party beneficiaries of such provisions and entitled to enforce them directly.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first set forth above.

AURA SYSTEMS, INC.

By:

Name:

Title:

KOYAH MICROCAP PARTNERS MASTER FUND, L.P.

By: Koyah Ventures LLC, its general partner

By:

Name:

Title:

[Signature Page to Agreement]

I:\Spodocs\28601\00024\agree\00288033.DOC:lg

Schedule of Exceptions

Liens

1. El Seguendo real property and facilities are subject to a security interest related to mortgage financing and a pending sale/leaseback transaction.

2. Note receivable for approximately $1,000,000 under Alpha Ceramics purchase agreement has been assigned as collateral to the purchasers in such sale/leaseback transaction.

3. The Plaintiffs in Arthur Schwatz v. Aura Systems, Inc. received a Writ of Attachment to collect a portion of their judgment. On May 3, 2004, the Plaintiffs used this Writ to effect a levy against the Company's primary bank account and received approximately $191,689. On May 11, 2004, Plaintiffs returned those funds to the Company without relinquishing their rights under the Writ. On June 7, 2004, the Plaintiff and the Company entered an Agreed Judgment in this case with a 45 day delayed effective date.

Defaults

1. Shareholder litigation (Barovich/Chiu et al ) judgment settlement for approximately $789,000 is in default. In April of 2003, this creditor served Writs of Execution against one of the Company's bank accounts but has taken no further action.

2. Convertible notes issued in August October 2002 for a total principal amount of $625,000 are or may be in default.

3. The $1,000,000 Note Payable to the purchasers in the sale/leaseback transaction, dated December 1, 2002, became due and payable on May 30, 2004.

Financial Statements

1. The long-term note receivable from Alpha Ceramics was assigned to the Purchasers in the Sale/Leaseback Agreement, dated December 1, 2002, as disclosed in the footnotes and MD&A of recent public filings (see Liens Note 2 above); however, this receivable was included on the balance sheet in the most recent financial statements.