Unassociated Document

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended August 31, 2005

Commission File Number 000-17249

AURA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

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

2330 Utah Avenue

El Segundo, California 90245

(Address of principal executive offices)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES o NO x

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

Yes o No x

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

Yes o No x

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

Class		Outstanding at September 30, 2005

Common Stock, par value $0.005 per share		439,074,474 Shares

AURA SYSTEMS, INC. AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION		3

	ITEM 1.	Financial Statements	3

		Statement Regarding Financial Information

		Condensed Consolidated Balance Sheets as of August 31, 2005 (Unaudited) and February 28, 2005	4

		Condensed Consolidated Statements of Operations for the Three and Six Months Ended August 31, 2005 (Unaudited) and 2004 (Unaudited)	5

		Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 31, 2005 (Unaudited) and 2004 (Unaudited)	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	7

	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	22

	ITEM 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION		23

	ITEM 1	Legal Proceedings	23

	ITEM 2	Changes in Securities	23

	ITEM 3	Defaults on Senior Securities	24

	ITEM 6.	Exhibits and Reports on Form 8-K	24

SIGNATURES AND CERTIFICATIONS			25

AURA SYSTEMS, INC. AND SUBSIDIARIES

QUARTER ENDED AUGUST 31, 2005

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The consolidated financial statements included herein have been prepared by Aura Systems, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). As contemplated by the SEC under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by accounting principles generally accepted in the United States of America. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended February 28, 2005, as filed with the SEC (file number 000-17249).

AURA SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	August 31, 2005			February 28, 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	212,808		$	61,376
Receivables, net		255,658			637,436
Current inventories		564,723			802,003
Other current assets		529,863			696,157

Total current assets		1,563,052			2,196,972

Property and equipment, at cost		13,787,996			13,839,286
Less accumulated depreciation and amortization		7,354,317			7,250,240

Net property and equipment		6,433,679			6,588,996

Non-current inventories		4,655,060			4,519,809

Total assets	$	12,651,791		$	13,305,777

Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable	$	3,892,128		$	3,322,137
Notes payable		9,876,110			8,730,982
Convertible notes		5,975,345			5,686,527
Derivative liability		100,072			16,254,502
Accrued expenses		2,739,245			2,376,346
Deferred income		164,625			164,625

Total current liabilities		22,747,525			36,535,119

Minority interest in consolidated subsidiary		481,475			653,891

COMMITMENTS AND CONTINGENCIES
Stockholders' deficit
Series A Convertible, Redeemable Preferred stock par value $0.005 per share and additional paid in capital. 1,500,000 shares authorized, 591,110 shares issued and outstanding at August 31 and February 28, 2005		2,956			2,956
Series B Convertible, preferred stock, par value $0.005 per share, 2,675,491 and 2,650,798 shares issued and outstanding at August 31, 2005 and February 28, 2005		9,980			9,857
Common stock par value $0.005 per share and additional paid in capital. 500,000,000 shares authorized, 439,074,474 issued and outstanding at August 31 and February 28, 2005.		2,195,301			2,195,301
Committed common stock		3,102,958			3,102,958
Additional paid-in capital		316,785,992			316,662,653
Accumulated deficit		(332,674,396	)		(345,856,958	)

Total stockholders’ deficit		(10,577,209	)		(23,883,233	)

Total liabilities and stockholders’ deficit	$	12,651,791		$	13,305,777

See accompanying notes to these unaudited condensed consolidated financial statements.

AURA SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED AUGUST 31, 2005 AND 2004

(Unaudited)

	Three Months						Six Months
	2005			2004			2005			2004
Net Revenues	$	274,007		$	599,443		$	804,710		$	1,285,277

Cost of goods		102,058			129,419			297,110			398,417

Gross Profit		171,949			470,024			507,600			886,860

Expenses
Engineering, research and development expenses		270,137			633,498			786,806			1,179,128
Selling, general and administrative		1,138,962			1,557,898			2,207,871			2,920,629
Litigation settlements		-			2,088,758			-			2,088,758
Total costs and expenses		1,409,099			4,280,154			2,994,677			6,188,515

Loss from operations		(1,237,150	)		(3,810,130	)		(2,487,077	)		( 5,301,655	)

Other (income) and expense
Interest expense, net		402,025			7,848,415			719,650			8,992,823
Change in warrant liability		(19,955,887	)		-			(16,154,430	)		-
Other (income) expense, net		(55,317	)		(14,941	)		(62,442	)		(28,295	)
Income (Loss) before minority interest		18,372,029			(11,643,604	)		13,010,145			(14,266,183	)

Minority interest in net income of consolidated subsidiary		(73,473	)		47,133			(172,415	)		(3,970	)

Net Income (Loss)	$	18,445,502		$	(11,690,737	)	$	13,182,560		$	(14,262,213	)

Basic and diluted income (loss) per share
Total basic and diluted income (loss) per share	$	0.04		$	(0.027	)	$	0.03		$	(0.033	)
Weighted average shares used to compute basic and diluted income (loss) per share		439,074,474			430,923,150			439,074,474			430,923,150

See accompanying notes to these unaudited condensed consolidated financial statements.

AURA SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED AUGUST 31, 2005 AND 2004

(Unaudited)

	2005			2004

Net cash used in operations	$	(1,637,642	)	$	( 1,845,176	)

Investing activities:
Payments on investor receivable		231,666			—

Financing activities:
Debtor in possession financing		1,090,476			-
Issuance of debt		116,928			150,000
Repayment of debt		(62,274	)		( 93,995	)
Issuance of convertible notes		288,815			1,730,000
Net proceeds from sale of Series B preferred stock		123,463			—
Net cash provided by financing activities:		1,557,408			2,174,973

Net increase (decrease) in cash		151,432			(59,171	)
Cash and cash equivalents at beginning of period		61,376			83,200
Cash and cash equivalents at end of period	$	212,808		$	24,029

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	184,462		$	164,027
Income Tax	$	-		$	-

Unaudited supplemental disclosure of noncash investing and financing activities:

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

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

See accompanying notes to these unaudited condensed consolidated financial statements.

AURA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2005

(Unaudited)

1) Basis of Presentation

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

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications for comparability necessary to present fairly the financial position of Aura Systems, Inc. and subsidiaries at August 31, 2005 and the results of its operations for the six months ended August 31, 2005 and 2004.

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

2) Going Concern

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

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

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

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

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

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

3) Summary of Significant Accounting Policies

Principles of Consolidation

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

Revenue Recognition

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

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

Cash and Cash Equivalents

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

Accounts Receivable

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

Inventories

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

Property, Plant, and Equipment

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

Buildings			40 years
Machinery and equipment			5 to 10 years
Furniture and fixtures			7 years

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

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

Minority Interest

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

Income Taxes

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

Estimates

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

Recently Issued Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A brief description of the provisions of this Statement

The date that adoption is required

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

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

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

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

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

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

4) Inventories

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

	August 31, 2005			February 28, 2005
	(unaudited)
Raw materials	$	3,741,844		$	3,720,204
Finished goods		5,001,366			5,639,859
Reserved for potential product obsolescence		(3,523,427	)		(4,038,047	)

		5,219,783			5,321,812
Non-current portion		4,655,060			4,519,809

Current portion	$	564,723		$	802,003

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

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

5) Property, Plant & Equipment

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

	August 31, 2005		February 28, 2005

Land	$	3,187,997	$	3,187,997
Buildings		6,408,796		6,408,796
Machinery and equipment		1,747,245		1,798,485
Furniture and fixtures		2,308,023		2,308,023
Leasehold improvements		135,935		135,935

		13,787,996		13,839,286
Less accumulated depreciation and amortization		7,354,317		7,250,240

Property, plant and equipment, net	$	6,433,679	$	6,588,996

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

6) Accrued expenses

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

	August 31, 2005		February 28, 2005

Accrued payroll and related expenses	$	217,455	$	352,836
Accrued interest		1,209,260		856,662
Customer advances		335,208		343,081
Accrued accounting fees		233,963		170,000
Accrued insurance		-		95,251
Accrued dividends		525,377		525,377
Other		217,982		33,139

Total	$	2,739,245	$	2,376,346

7) Notes Payable and Other Liabilities

Notes payable and other liabilities consist of the following:

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

		15,851,455		14,417,509
Less: current portion		15,851,455		14,417,509

Long-term portion	$	-	$	-

(a)	Represents secured notes payable (the "Secured Notes") on June 15, 2004, bearing interest at 10% per annum and convertible at the option of the holder into new debt or equity securities of the Company at a 20% discount to the best terms by which such new debt or equity is sold to any new investor. The Secured Notes may be prepaid on notice at a 15% premium. Repayment of the Secured Notes is secured by substantially all the assets of the Company (with limited exceptions).

	In connection with the Secured Notes issued in fiscal 2004, primarily as inducements to the lender to continue to provide interim funding, we agreed to issue warrants to purchase an aggregate of 3,200,000 shares of common stock at a price per share of $0.11, exercisable through January 7, 2011. The value of these warrants was recorded as interest expense in fiscal 2004. In April 2004, we issued additional warrants (with a net exercise feature) to purchase an aggregate of 12,369,878 shares of common stock at a price per share of $0.024 to the same lenders. These warrants were valued at $674,158 and have been recorded as interest expense in the accompanying financial statements. As of February 28, 2005, we have reclassified the value of the warrants to a derivative liability. (See note 8)

	Repayment of the Secured Notes is secured by substantially all of our assets (with limited exceptions).

	Between June 1 and August 20, 2004, we received $760,000 of additional interim funding from certain holders of Secured Notes on substantially the same terms as those for the Secured Notes issued at May 31, 2004.).

	During the six months ended August 31, 2005, we received $288,817 of additional interim funding from certain holders of Secured Notes on substantially the same terms as those for the Secured Notes issued at May 31, 2004.

(b)	Convertible notes payable carry an 8% interest rate and are convertible into common stock at various conversion rates (the "8% Convertible Notes"). These notes were due and payable during the fourth quarter of fiscal 2003.

(c)	Notes payable-buildings consist of a 1st Trust Deed on two buildings in California bearing interest at the rate of 7.625%. A final balloon payment is due in Fiscal 2009. In April 2003, we defaulted on these notes payable and, in June 2004, cured such defaults.

	During the period ended August 31, 2005, $116,928 in fees and late charges were added to the balance of the note.

(d)	Notes payable - related parties consist of two separate notes: a $1,000,000 note payable, dated December 1, 2002, which was entered into in connection with the sale of a minority interest in Aura Realty, as more fully described in our Form 10-K for the year ended February 28, 2005 as filed with the SEC (the “$1M Note”) and a $150,000 demand note, dated August 6, 2004, which was issued in exchange for a $150,000 cash advance from an employee of the Company (the “$150K Note”).

(e)	The litigation payable represents the legal settlements entered into by Aura with various parties. These settlements call for payment terms with 8% interest rate to the plaintiffs through fiscal 2004. We are in default with respect to payments required under these settlements.

	Litigation payable also comprises of the balance of the promissory note payable as part of the Mutual Settlement Agreement and Release. This was a litigation between Aries Group and the Company wherein the Aries Group had alleged among other things, the breach of numerous provisions of the Termination of Employment Agreements.

8) Capital

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

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

Warrants

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

Activity in issued and outstanding warrants was as follows:

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

9) Significant Customers

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

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

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

10) Contingencies

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

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

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

Moshe and Maimon Litigation

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

Chapter 11 Reorganization

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

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

Other Litigation

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

Capital Transactions

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

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

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

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

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

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

3,573,530 shares for cancelled preferred stock

6,065,699 shares for DIP financing

3,349,500 shares for new money contribution

644,401 shares issued for legal settlements

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

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

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

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

Overview

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

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Inventory Valuation and Classification

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

Valuation of Long-Lived Assets

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

Specific asset categories are treated as follows:

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

Capital Transactions

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

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

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

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

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

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

Chapter 11 Reorganization of Aura Systems, Inc.

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

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

Chapter 11 Reorganization of Aura Realty, Inc.

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

Other Litigation

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

ITEM 2. Changes in Securities

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

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

ITEM 3. Defaults on Senior Securities

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

ITEM 6. Exhibits and Reports on Form 8-K

a. Exhibits:

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

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

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

b. Reports on Form 8-K:

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

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

SIGNATURES

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


	AURA SYSTEMS, INC.

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




Date:March __, 2008	By:	/s/Melvin Gagerman
		Melvin Gagerman Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer


By: /s/Melvin Gagerman
Melvin Gagerman Chief Executive Officer

March , 2008