AURA SYSTEMS INC, 10-K, 1996-06-05

AURA SYSTEMS INC
10-K, 1996-06-05
ELECTRONIC COMPONENTS, NEC

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------

Form 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended........................ February 29, 1996

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from...............to....................
Commission File Number....................................0-17249

AURA SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware 95-4106894
-------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2335 Alaska Ave.
El Segundo, California 90245
----------------------- -----
(Address of principal executive offices)

(310) 643-5300
--------------
Registrant's telephone number

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

At May 30, 1996 the aggregate market value of the voting stock held by non-
affiliates of the Registrant was $279,090,777. The aggregate market value has
been computed by reference to the average bid and asked price of the stock on
May 30, 1996. On such date the Registrant had 62,858,283 shares of Common Stock
outstanding.
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PART I

ITEM 1 BUSINESS

INTRODUCTION

Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, is
engaged in product development, commercialization and sales of systems and
components using patented and proprietary electromagnetic technology as well as
other products such as sound cards, modems, multimedia kits and computer
monitors.

The Company's proprietary and patented technology is being developed for
use in systems and products for commercial, industrial, consumer and government
use. To date, a combination of Aura funds and commercial and governmental
development contracts have been utilized in the process of developing product
applications. In the fiscal year ended February 29, 1996 ("Fiscal 1996"), a
majority of the Company's consolidated revenues have been generated from sales
of commercial products. See "Management Discussion and Analysis of Financial
Condition and Result of Operations." Sales of computer related products to a
single unrelated third party were $20.6 million or 25.1% of revenues. No sales
to this customer occurred in prior fiscal years. Sales to MCDP declined to $3.5
million or 4.3% in Fiscal 1996 from $7.4 million or 17% in Fiscal 1995.

The Company believes its systems represents significant advancement in the
application of electromagnetic technology. One of the basic forces of nature,
electromagnetism can, if used in a controlled fashion, provide the link between
electronic control and the mechanical, communications and display worlds.
Specifically, the Company has developed types of electromagnetic devices to
accomplish these links: electromagnetic actuators to provide back and forth
motion, dielectric resonator oscillators and similar devices to generate
electromagnetic energy of particular wavelength and actuated mirror arrays to
direct and point electromagnetic waves.

Prior to Fiscal 1992, the Company was engaged in work on various
classified military programs. The Company has now completed the transition to a
manufacturer and supplier of consumer and industrial related products and
services.

In February 1993, to increase the Company's capacity to manufacture
machined parts, the Company completed the purchase of substantially all of the
assets, which primarily included heavy machinery and inventory, of Precise
Precision Products, Inc. (dba. Four Star Precision Products) a California
corporation. In June 1993 to expand the Company's ability to produce materials
for its AMA products, Aura Ceramics, Inc., a Delaware Corporation, was formed to
operate a ceramics manufacturing facility. The facility, acquired through an
asset purchase, was previously operated by Alliant Techsystems, Inc. The
facility is located in a leased building in New Hope, Minnesota and the purchase
included ceramic manufacturing kilns and heavy machinery. In September 1994,
the Company funded NewCom as a wholly owned subsidiary to engage in the
manufacture of modems and multi media products. (See NewCom, Inc. under
Subsidiaries). In October 1994, the Company completed the acquisition of all
outstanding shares of Electrotec, Inc. which is engaged in the business of
leasing concert sound systems. (See Electrotec Productions, Inc. under
Subsidiaries). Subsequent to the close of the fiscal year, the Company has
executed a Stock and Investment Purchase Agreement to acquire 100% of the
outstanding shares of MYS Corporation of Japan, which is engaged in the
manufacture and sale of speakers and speaker systems.
(See MYS Corporation under Subsidiaries).

Set forth below is a summary description of the Company's technology with
examples of its applications and some of the Company's principle agreements.

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DESCRIPTION OF BUSINESS

Technology

. Magnetic Technology

The Company has developed and patented highly efficient magnetic
circuits (See Patents), which provide substantial improvements over devices of
similar purpose available prior to Aura's technology. The advantages include
extended performance, reduced size and ease of control over previous devices.

. Magnetic High Force Actuators (HFA)

An actuator is a device that creates a lateral force upon command.
Actuators are used in a wide range of applications, including high speed,
precision applications such as audio speaker drivers, computer-controlled
applications such as the control of aircraft flaps and heavy-duty applications
such as the lifting of the bed of a dump truck. Actuators are generally
hydraulic, pneumatic, mechanical or voice coil. Hydraulic, pneumatic and
mechanical actuators can produce extremely high forces and long strokes in
relatively small packages. Voice coil actuators provide high precision and high
speed operation, producing short stroke and very little force. Actuators are
most commonly used to position objects, or to create or cancel vibrations by
producing a force upon command.

Hydraulic and pneumatic actuators use fluid or gas pressure to create
this force. When commanded, force is created via opening a valve, which lets
the fluid or gas under high pressure into a chamber. The speed and
controllability of this type of actuator is defined by the precision of this
valve, the size of the chamber, and the pressure of the gas or fluid.

Mechanical actuators use a motor and gearbox to turn rotary motion into
linear motion. The speed and force of this type of actuator is a function of
the size of the motor and the gear ratios in the gearbox.

A voice coil actuator uses a law of physics known as Lorentz's Law to
convert electricity directly into force. When electricity goes through a wire,
it creates a magnetic field around that wire. If that wire is being exposed to
an external magnetic field, these fields "repel" each other in the same way as
two magnets will repel. If the external magnetic field is held constant, the
repelling force is proportional to the level of electric current in the wire.
This property permits voice coil actuators to be controlled precisely and to
react quickly.

Aura's high force electromagnetic actuator (HFA) is the first
"Lorentz's Law" actuator to provide both the high forces and long strokes
produced by hydraulic or pneumatic actuators at the speed and precision of
response produced by voice coil actuators. This ability is attributable to the
patented magnetic design. High energy permanent magnets are arranged to focus
nearly all of their magnetic energy into useful work. Standard voice coil
actuators typically utilize about 40% of the available magnetic energy; Aura's
HFA uses nearly 90% of that energy. The magnetic arrangement also allows
virtually unlimited stroke potential. Standard voice coil actuators typically
provide less than one inch of stroke; Aura's HFA's stroke is virtually
unlimited, as is demonstrated in an actuator that Aura has built, which can
produce over 1,000 pounds of force over a 32 inch stroke.

A major advantage of Aura's HFA design is its simplicity. With one
moving part, the Aura HFA can replace motor-driven actuators with their
associated gearboxes, and hydraulic and pneumatic actuators with their
compressors, fluid valves, seals, etc. Because it is controlled electronically,
HFA's can be driven directly by computer command. The Company has commercially
employed its HFA technology in, among other things, its speaker line, motion
simulators and actuated weld heads.

Because the HFA is an all electromagnetic device it does not require
the use of an environmentally regulated fluid or organic chemical in its use and
operation. Due to its design, the device is automatically shielded and does not
radiate electromagnetic energy. Thus the HFA is truly an environmentally clean
device. The HFA can be in a variety of sizes and shapes and serve as a
replacement part without the need for retooling for most

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applications. Finally, the efficiency of the HFA is such that, in many
applications, the system cost using this product is lower going in and
considerably lower in maintenance throughout the life of the machine.

. Electromagnetic Actuator (EMA)

During Fiscal 1995, the Company developed, built and demonstrated a new
type of actuator, called the Electromagnetic Actuator, or EMA. EMA was
developed to fill the performance gap between linear actuators and solenoids.

Like a solenoid, EMA operates on purely electromagnet principles, and
therefore uses no permanent magnets. It is extremely simple in construction (1
moving part, 5 parts total) and is extremely rugged. It was developed initially
for the industrial and automotive markets, but has shown promise in the test
equipment market as well. An EMA is physically equivalent in size to solenoids
with comparable force capacities, and can be operated at temperatures exceeding
450(degrees)F.

What sets EMA apart from a standard solenoid, is its ability to custom-
tailor the force produced as a function of stroke. For example, an automotive
EGR valve requires peak force at the beginning of the stroke in order to "crack"
the valve open. A standard solenoid, by its very nature, produces peak force at
the end of its stroke, not at the beginning. Therefore, a solenoid will require
a large amount of power to compensate for its inherent limitation. Conversely,
the force profile of an EMA can be customized to provide high force at the
beginning of the stroke, resulting in a more efficient device that is much
easier to control for the EGR application.

Another advantage of EMA over a solenoid, is its actuator-like ability
to provide consistent force over much longer stroke lengths. As stated above, a
solenoid produces peak force at the end of the stroke. To be used for an
application requiring proportional control, a "proportional" solenoid requires
complex electronics to compensate for this inherent non-linearity. An EMA
basically "spreads" the solenoids peak force over the entire stroke, providing
linear force over a greatly extended stroke length without need for complex
electronics.

. Light Efficient Displays - Actuated Mirror Array (AMA)

Light displays such as projectors and large screen televisions can be
made by a number of techniques many of which are available on the market. These
include liquid crystal displays (LCD), cathode ray tubes (CRT), deformable
mirror displays (DMD), oil film projectors and plasma tubes. For the segment of
the market dealing with large images, the major requirement is to get more light
out per unit watt of electricity in. However, each of these technologies
requires the utilization of an element which causes a loss of light efficiency
in order to create the image.

Liquid crystals utilize an electric field to change the light
polarization properties of a surface which is then used to create an array of
cells to paint an image. Cathode ray tubes utilize an electron beam which is
bent by the video signal to create images by colliding with a phosphor on the
front surface to create light. DMDs utilize an electric field to bend a mirror
at a large angle to switch it to either "on" or "off". Oil film projectors
change the transmissive properties of an oil film allowing an image to be
created. Plasma tubes create an electrical discharge in a tiny tube filled with
gas. The gas glows allowing an image to be created by an array of such tiny
tubes. Each of these technologies have their own advantages and limitations thus
creating niches within the display market where competitive advantages can be
achieved.

The Company has developed and patented a technology (a "light valve")
for generation of images called the Actuated Mirror Array (AMA) technology. It
utilizes an array of micro actuators in order to control tiny mirrors whose
position change is used to cause a variation in intensity. The Company expects
this device to have a major impact on applications where light efficiency is
paramount such as in large screen television, movie or exhibition displays, or
even the testing of electro optical devices for military or civilian use.
Management believes that the AMA may be manufactured at a competitive cost in
large quantities, thus making it commercially feasible. Thus, AMA based devices
are expected to offer the combination of increased display intensity at lower
costs of production.

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The AMA technology is considerably different from the mirror array
technology known as DMD which is not covered by Aura's patents. DMD does not
utilize an actuator to steer the mirror which, due to lack of controllability
can only be commanded to either full "on" or full "off "in intensity. Images are
created by dividing the sampling time available for a given video frame thus
causing a larger motion of the mirrors at more stressing rates than Aura's
technology requires. The Company believes that as a result, the AMA technology
has a technical advantage over DMD in achieving higher contrast, more intensity
and longer lived element.

The Company as entered into a license and manufacturing agreement with
Daewoo Electronics Co., Ltd., to build television and other devices based on AMA
Technology (see Agreements - Daewoo AMA Agreement)

. Dielectric Resonator Oscillators (DRO) & Similar Devices

An oscillator is a device used to create electromagnetic radiation.
Oscillators are used as a basic component in electromagnetic (wireless)
communications systems such as cellular telephones, satellite transponders,
radio-telephonic communications and microwave links (High frequency short
wavelength electromagnetic waves). There are a variety of types of oscillators
including oscillators which include voltage controlled oscillators (VCO),
crystal oscillators, varactor tuned oscillators, mechanically tuned oscillators
(MTO) and Gunn oscillators.

A dielectric resonator oscillator (DRO) is a particular form of
oscillator that uses a piezoceramic disk to create a resonant cavity for
exciting electromagnetic energy. A piezoceramic disk is a device that produces
force when voltage is applied to it, which in turn can be used to produce
motion. DRO's have significant advantages in the range of 2-18 GHz. which
spectrum is used in much of the now popular telecommunications applications. The
DRO typically uses a factor of 10 less power than the previously used MTO's and
do not suffer from vibration induced noise. Also, the service life is typically
a factor of 10 or more greater than previous technology, thus affecting
maintenance costs of hard to access equipment. The Company believes that the
quality of its product and resulting lowered customer maintenance provide it
with a competitive advantage.

. Piezoelectric Materials

Aura Systems manufactures materials which are known as piezoelectric
materials. Such materials are characterized by a change in dimension when
voltage is applied to them and are a main component of the Company's AMA display
technology. The Company has a factory based in Minnesota, for the production of
such materials which include standard materials used in devices as simple as
jewelry cleaners to devices as complex as medical ultrasound equipment. In
addition, the Company has proprietary mixtures of material which have shown
greater performance capability than other materials on the market. The Company
has acquired all commercial rights to a patented and patent pending formulation
of material known as Rainbow(TM) (Reduced And Internally Biased Oxide Wafer),
which has significant potentials for enhanced material performance.

. Magnetic Materials

The Company is pursuing research into magnetic materials based on the
work of its Russian operation located in Moscow. The principal research involves
the development of new materials and improvement in the manufacturing technology
and processes of magnet production used by the Company in its devices.
Significant progress has been reported in three major areas affecting high
energy magnets.

The Company holds proprietary know how and patents from its Russian
operation dealing with a new formulation and processing of one of the major high
energy magnet materials. The formulation can be readily manufactured in a
number of shapes, including ring magnets which can greatly simplify the
production of some of the Company's magnetic products.

The manufacturing process for the above material appears to offer
considerable potential for cost savings during material production. This
process allows for greater variation in the initial composition of materials
thus providing higher yield.

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Recently, the Company's Russian Operation has perfected a new process
that results in corrosion resistant high energy magnet material without
requiring coatings. This process could result in considerable cost reductions to
the Company for magnets used in its multimedia and TV speakers. The coating
process needed with high energy magnets available to date, is responsible for a
large percentage of the machining and handling cost of finished small sized
magnets that are currently used in the Company's speaker systems.

. Sparking Gasket System (SGS) Material

The sparking gasket system (SGS) structure is made up of a gasket
material and electric circuit with integrated sparking electrodes. SGS is based
upon highly unique materials developed exclusively by the Company. The gasket
material utilizes a proprietary polymer formulation with unique additives. This
allows the sparking system to perform under the extremes of internal combustion
engine operations. These range from sub-zero to wide open throttle, e.g.,
1800(degrees)F temperatures and high voltage (40 KV+). Also, the materials are
highly tolerant of hot exhaust gases, engine coolant and oil. Gasket materials
are locally transformed by the engine's exhaust gases from a sealing rubber to a
ceramic heat barrier while the remaining rubber material seals with increasing
effectiveness.

. Signal Processing Patents

The Company acquired the patents and all the rights to exploit the
technology developed by Dr. Daniel Graupe of the University of Illinois. The
technology known as Blind Adaptive Filtering is an optimal process of filtering
noise from electronic signals. Such signals might be data coming over
satellites and or telephone lines, in the air for television signals or even in
the electronics associated with hearing aids. The techniques require no special
statistical knowledge of the signal or noise processes unlike previous attempts
at noise filtering. The Blind Adaptive Filter gives optimal performance due to
the lack of assumptions required.

Applications

The Company believes it has core electromagnetic technology which can
be used for many applications in numerous fields. The following are just some
examples of application and the advantages provided by Aura's technology.

. AuraSound(TM) Speakers

An important line of products based on Aura's electromagnetic actuator
technology, are the AuraSound(TM) audio speakers and Bass Shaker(TM) sound
enhancement devices.

Of the estimated one-half billion loudspeakers manufactured and sold
each year around the world, approximately 95% use a voice coil motor to produce
the movement of the speaker cone. The basic design of the voice coil motor has
not fundamentally changed since its initial introduction, almost 100 years ago.
Aura has developed a new, more efficient voice coil motor--the AuraSound(TM)
voice coil motor--thus significantly expanding the state of the art. The
AuraSound(TM) voice coil motor utilizes a new type of magnetic structure--based
upon Aura's patented line of high force linear actuators--to drive speaker
cones.

The Company believes that the AuraSound(TM) advantages as compared to
competitors speakers are as follows:

. Higher efficiency, lower distortion
. Enhanced bass output--for lower lows
. Longer cone excursion capability--for higher volume sound
. Improved linearity--for more accurate sound reproduction
. No magnetic shielding required--not expected to distort TV or
video/computer monitor displays or corrupt data in computers
and disks
. Low weight and small size
. Adaptable design which allows speakers of any size, shape and
performance to be manufactured.

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Bass Shaker(TM) - The Bass Shaker(TM) is a product that the Company
started shipping at the end of Fiscal 1995. The Bass Shaker is an
electromagnetic actuator where the coil is stationary and the magnetic assembly
is moving. The force created by this motion generates a "felt bass" when
responding to low sound vibrations. This makes the Bass Shaker(TM) a very
compact and efficient subwoofer. The Bass Shaker(TM) is bolted to the auto floor
(under the seats or on the sides), and then connected to the existing stereo
system. With the Bass Shaker(TM), the driver and passengers get the feel and
sound of a very large sub-woofer without producing sound outside of the car.

. Electromagnetic Valve Actuators (EVA)

Over the past several years, the Company has been applying its patented
electromagnetic technology to a variety of applications. One application
developed is its electromagnetic valve actuator (EVA), which is an
electromagnetic actuator capable of opening and closing internal combustion
engine valves, replacing the mechanical camshaft on an engine. EVA uses the
power of electromagnets to open and close engine valves, and is capable of
accomplishing this in less than 3/1000 of a second. The engine computer that is
used on virtually all modern automobile engines will send to the EVA electronics
module a valve position command in the same way it will send a fuel injector
command. The EVA electronic module will implement the command, and wait for the
next command from the computer.

Two major benefits arise from the EVA's ability to open and close the
valve electromagnetically: 1) the camshaft and associated mechanical hardware
can be eliminated, and 2) the opening and closing of the intake and exhaust
valves can be commanded by the engine computer. As an example, EVA has been
retrofitted on a 140 HP, 2.3L 4 cylinder Ford engine that is currently running
in the laboratory.

Computer control of the valve timing has potentially material benefits
to engine performance, fuel economy and emissions. With EVA, the computer can
precisely control the amount of air that is allowed into the engine in the same
way that modern fuel injectors control the amount of fuel. By optimizing this
"fuel-air mixture" dynamically as a function of engine RPM and load, optimum
engine performance can be achieved over the entire operating range of the
engine. With a standard camshaft, the engine can be optimized at only one range
of RPM and load conditions. That is why very high performance engines idle
"rough", as they are optimized for high RPM, thereby sacrificing smoothness at
low RPM.

By optimizing the fuel-air mixture dynamically, both performance
(horsepower) and fuel economy will increase, while emissions are expected to
decrease. The implementation of EVA also greatly simplifies the engine
mechanically. The entire camshaft assembly, with includes timing chain,
camshaft, rocker arms, etc. is replaced by very simple valve actuators. Other
emission systems currently on the vehicle, such as the EGR (exhaust gas
recirculation) and IMRC (intake manifold runner control) valves can be
eliminated. Even the throttle assembly can be eliminated by using EVA to
control the amount of air going into the engine. Overall engine cost may be
substantially reduced.

Due to the Company's patented design, EVA requires relative little
power to operate. Lab measurements have shown that the total power required to
operate EVA is typically well under 100 watts/valve. Because of friction and
mechanical losses, a typical camshaft requires 3 to 5 horsepower to operate
(1hp=750 watts).

The Company is currently under contract to retrofit EVA's on different
types of diesel, automobile and motorcycle engines.

. Flywheel Alternator Starter (FAS)

In continuing to push the state of the art in electromagnetic
technology the Company has developed a device, which it calls the flywheel
alternator starter (FAS), that replaces the existing flywheel, alternator and
starter in an automobile by:

Starting the engine electromagnetically (starter function)
Charging the battery (alternator function)
Providing inertia for smooth idling (flywheel function)

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This device has also the capability for high power generator that can provide AC
power such as:

110 VAC or 220 VAC
Up to 25KW capacity

The Company has built and installed the FAS device on a 2.3L Ford
Ranger that was one of the highlights of the SAE show in late February in
Detroit. The Company is currently developing an aftermarket generator using the
FAS technology that will be commercially available toward the end of 1996. This
generator when installed in an automobile will generate both AC and DC power to
be used for numerous industrial applications as well as emergency power. The
Company is currently exploring numerous possibilities with OEMs worldwide who
have shown great interest in this technology and its applications.

. Other Industrial Applications

The Company believes that the sphere of applications for
electromagnetic technology is large. In the last few years prototypes using
this technology have been built for evaluation in a variety of industrial
applications. The prototypes and limited production units currently being
tested and evaluated have potential automotive, industrial, petrochemical,
aviation and consumer applications. These applications include fuel flow
control, active, welding, fluid power control, shaker control, structure
control, redraw actuation for aluminum can making, flight motion simulation and
amusement rides. The Company has commercially manufactured its technology in
its speaker line, motion simulators, amusement rides, redraw actuators for
aluminum can-making machines, and actuated weld heads.

. Interactor(TM)

The Company developed, in the Fall of 1993, a new product, called the
"Interactor(TM)", intended for the video game market. The Interactor(TM) vest
utilizes an electromagnetic transducer to convert electrical signals derived
from the audio channel of a television, stereo, video game, or the like, into
low frequency (bass and sub-bass) vibratory sensations. The transducer itself
operates on the principle known as Lorentz's Law, which is the same
electromagnetic principle used in the Company's electromagnetic actuators and
speakers.

The Company sold approximately 420,000 total Interactors(TM) vests. In
Fiscal 1996 Interactor vest sales were very disappointing with net sales of only
$3 million. After a disappointing holiday season the Company decided to
drastically curtail Interactor activities and stop actively pursuing the
business. (See Item 7 Management Discussion And Analysis - Results Of
Operations).

Subsidiaries

The following are the Company's subsidiaries:

. Delphi Components

Delphi Components, Inc. ("Delphi") is a wholly owned subsidiary of
Aura. Delphi is in the business of design, manufacture and sales of microwave
components. Microwaves are the portion of the electromagnetic spectrum with
wave lengths as long as 30 cm down to sub millimeter wavelengths. The single
most important product of the division are dielectric resonator oscillators
(DRO's) described fully under Description of Business-Technology.

Historically, Delphi served the military marketplace with components
for microwave communications and electronic warfare. The company started its
own military conversion program and has switched its products to servicing the
needs of the commercial microwave customer base.

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The commercial microwave business is strongly dominated by satellite
communications, radio telephone and television broadcast and distribution
marketplaces. With the large growth in the cellular communications business,
Delphi has positioned itself to provide microwave sources for these markets.

DRO's such as manufactured by Delphi are a major component of the up
links and down links necessary to get television or telephone signals to and
from satellites. They are a major component in satellite decoders for cable
television distribution systems and are a major component in cellular telephone
links as well as more traditional microwave based T4 telephone links.

Delphi has traditionally provided the bulk of its products in the 6-8
GHz. portion of the microwave spectrum for radio telephone usage. With the
changes in the microwave market, 1-2 GHz. units to support personal
communications systems (cellular telephones) and 16-18 GHz. to service satellite
communications are now sold as well. In recent months the company has received
recognition for its low noise and high power units. In the crowded microwave
communications business, low phase noise is a key selection criteria amongst
Delphi's current and its potential new customers.

. Aura Ceramics, Inc.

In June 1993, the Company acquired the assets of the Ceramics Center of
Alliant Techsystems, Inc. solely for the assumption of liability for
environmental cleanup with no current cash payments required. The cost of
environmental cleanup has been estimated at $750,000 and would be payable upon
vacancy of the leased premises. Aura Ceramics, Inc. began operations shortly
after formation. Aura Ceramics is a producer of high performance piezoelectric
materials such as lead lanthanum zirconium titanate (PLZT), lead zirconium
titanate (PZT), and reduced and internally biased oxide wafers (RAINBOW(TM))
materials. These materials are used as sonar transducers, control actuators for
commercial and military laser ring gyros, light modulator actuators, a variety
of piezoelectric actuator, and acoustical sensor applications. Aura Ceramics
has been a materials manufacturer and is now also becoming a subsystem supplier
with parts utilizing materials manufactured by it.

. Electrotec Productions, Inc.

In Fiscal 1995, the Company purchased 100.0% of the stock of Electrotec
Productions, Inc., a California corporation ("Electrotec"). The total purchase
price was $439,000. As part of the purchase, the Company advanced $1.7 million
to Electrotec to pay off a shareholder loan and a bank loan. Electrotec is in
the worldwide business of providing sound systems for concerts. To strengthen
Electrotec's presence in the European market, Electrotec established a European
subsidiary which in December, 1995, completed an asset purchase of Audio Lease,
Ltd., a United Kingdom based competitor of Electrotec.

. NewCom, Inc.

NewCom is a subsidiary for the manufacturer and marketer of leading
edge high performance computer communication and multimedia products for the IBM
compatible and Apple Macintosh personal computer markets. NewCom offers a line
of products including, among other products, internal data fax modems, speaker
phones and multimedia sound solutions.

The Company has set up a distribution system in a very short period of
time, selling its products to original equipment manufacturers ("OEMs"), value
added resellers ("VARs") regional distributors and various retailers and mass
merchants.

Currently, the Company has close relationships with its two primary
manufacturers one of which is in China and the other in Mexico. NewCom also
enjoys good working relationships with industry standard telecommunication and
multimedia chip vendors such as Rockwell International Corporation, Sierra
Semiconductors, Opti Corporation, Yamaha Corporation and Analog Devices
Incorporated.

In Fiscal 1995, the Company acquired all patents and rights from GS
Systems to noise suppression and reduction algorithms. The principal developer
of this technology is an internationally recognized scientist,

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Dr. Daniel Graupe, who is noted for his work in the field. Dr. Graupe has shown
a capability of eliminating a major portion of the noise found in wireless and
conventional telephone systems that corrupt data sent via fax. The Company is
developing a version of these noise reduction devices to use in NewCom fax
modems. If successful, devices with these components in them should be able to
operate at significantly higher data rates than conventional devices. However,
no assurances can be given that the above noise suppression filters will be
successful for the fax modem application and even if successful, no assurances
can be given to the time needed to bring such products to market.

. Auratech, Inc.

In late 1995, the Company purchased 50.1% of Auratech owned by a joint
venture partner (See Agreements-Auratech Industrial Equipment Venture). The
Company now owns 100% of Auratech and operates it as a wholly owned subsidiary.

. MYS Corporation

On February 20, 1996 the Company entered into a Memorandum of
Understanding ("MOU") with the principal shareholders of MYS Corporation of
Japan setting forth the Company's intent to purchase and the shareholder's
intent to sell 100% of the outstanding, shares of MYS, in exchange for shares of
Aura common stock in an amount and number to be determined. The MOU established
a framework in which the Company could conduct its due diligence and negotiate a
definitive sale and purchase agreement.

Subsequent to fiscal year end, the Company concluded its due diligence
and executed a definitive Stock and Investment Purchase Agreement with all the
MYS shareholders. The principal terms of the Stock and Investment Purchase
Agreement require the Company to issue common stock in such number of shares as
would equal Two Million Dollars in exchange for all outstanding shares of MYS
and its subsidiaries. In addition, the Company would assume existing long term
liabilities not to exceed Four Million Dollars and all assets of MYS and its
subsidiaries.

In addition to its corporate offices in Japan, MYS has manufacturing
operations in Malaysia and the U.S.A. MYS provides speakers to an OEM customer
base which includes Radio Shack as its most significant customer. No provision
has been made for the acquisition of MYS in the Company's financial statements
for the fiscal year end February 29, 1996. The Company will consolidate MYS
into its financial statements beginning the first quarter of fiscal year 1997.

. CAD/CAM

On May 9, 1989, Aura acquired International Micro CAD/CAM Engineering,
Ltd., a British Columbia corporation, and its wholly-owned subsidiary Micro
CAD/CAM Systems, Inc., a California corporation. These companies are engaged in
the design, development and marketing of computer aided design and manufacturing
software for sale to companies utilizing computer numeric controlled machining
equipment. Since Fiscal 1993, the operations of this subsidiary have been
dormant. The Company will merge this subsidiary into the Company.

Agreements

The following, are significant agreements that the Company has entered
into in connection with applications of its technology.

. Daewoo AMA Agreement

After a lengthy study of the Company's technology, in August 1992,
Daewoo Electronics Co., Ltd. entered into a definitive joint development and
licensing arrangement with the Company to develop and commercialize televisions
utilizing the AMA. The AMA is an array of tiny mirrors that can be independently
tilted to any angle over its range. Images are formed by controlling the tilt
angle of each individual mirror as a high intensity light source is reflected
off its surface, and is used for either front or rear projection television (see
Technology).

9
<PAGE>

The agreement provides for the payment by Daewoo to Aura of a
$1,500,000 licensing fee and the payment of approximately $2,000,000 by Daewoo
to Aura for development costs, all of which have been received by the Company.
Aura also is to receive a fixed royalty (depending on television size), for each
television set manufactured by Daewoo or licensed by Daewoo to a third party.
Under the agreement, Daewoo will be required, in the future, to license the
technology to all interested third parties. Furthermore, all the televisions
using the AMA will be identified on the product by an Aura trademark. Royalty
payments will be on a scheduled basis upon commencement of commercial
production. Daewoo has recently announced it's expectation to begin commercial
production in 1996.

No assurance can be given that commercial production will occur. The
ultimate degree of success (if any) of this venture is dependent on Daewoo, who
is responsible for all manufacturing and sales under the license agreement.

. Malaysian Joint Venture

The Company has received the first $500,000 payment toward the
$1,000,000 license fee with the second $500,000 payment due upon completion of
four speaker assembly lines.

. Auratech Industrial Equipment Venture

In May 1994, the Company entered into an agreement with Parviz
Nazarian, an individual ("Nazarian") for the formation of a corporation to
develop, design, manufacture and market machine tool, robotics and industrial
hand tool applications of the Company's electromagnetic technology. The
corporation was incorporated in Delaware, as Auratech, and is owned 50.1% by
Nazarian and 49.9% by the Company. The corporation will be jointly managed by
Aura and Nazarian. In connection with the agreement, in May 1994 Aura granted to
Nazarian an exclusive license to use Aura's patented and proprietary technology
in the field of machine tools, robotics and commercial and industrial hand
tools. In consideration of the license, Nazarian agreed to pay to Aura a non-
refundable license fee of $1,000,000, all of which has been received by the
Company.

Pursuant to the Company's agreement with Nazarian, (i) Aura will
contribute to the new corporation a working prototype of an exemplary product of
the type to be developed and designed by the new corporation; (ii) Nazarian will
contribute to the new corporation a sub- license of the rights and obligations
under the exclusive license; (iii) Nazarian will provide a $2,000,000 working
capital loan to the new corporation at prevailing commercial bank loan interest
rates; (iv) Aura and Nazarian will contribute their respective management
expertise to the new corporation; and (v) Aura will provide training to the new
corporation's personnel.

In June 1995, Auratech entered into a license agreement with DCT
(Detroit Center Tool). DCT is engaged in business relating to the design and
integration of robotics in automobile assembly lines. Under the license, DCT may
manufacture the Company's patented and proprietary electromagnetic actuator for
an actuated tool used in such assembly lines. Electronic controllers using the
Company's proprietary technology for use with the actuators built under license
will be purchased from the Company. The first application being sought by DCT
for use of the Company's electromagnetic actuator is in the actuation and
control of weld heads for chassis and body fabrication. Under the agreement DCT
will pay an annual license fee of $100,000 in 1997, $250,000 in 1998

10
<PAGE>

and $1 million every year thereafter for the life of the patents (approximately
16 years) in order to keep worldwide exclusive applications for use in
automotive assembly lines.

In late 1995 Aura puchased the 50.1% of Auratech owned by the Nazarian
group for 315,000 shares of restricted Aura common stock. The Company now owns
100% of Auratech and operates it as a wholly owned subsidiary.

. K & K Enterprises Joint Venture

On July 19, 1995, the Company entered into an agreement with K&K
Enterprises ("K&K") for the formation of a joint venture to manufacture and sell
speakers using Aura's proprietary technology. K&K has obtained a license to the
Company's technology and will grant an exclusive sub-license to the joint
venture. The joint venture has the exclusive right to build and sell speakers
using Aura's technology in the Republic of Taiwan, Indian Subcontinent, Middle
East and the European market. The Company owns 49% of the joint venture and K&K
owns 51%. As consideration for the license to K&K Enterprises, the Company will
receive a $1,000,000 fee, $400,000 of which was received in Fiscal 1996. K&K
obtained part of their rights under this joint venture in a novation executed by
Zylux Acoustic, a former joint venture partner with the Company.

On July 12, 1995 the Company entered into an agreement with K&K
Enterprises, for the formation of a joint venture to manufacture Aura's Bass
Shaker(TM), an audio enhancement sound system (See Description of Business-
Applications) incorporating Aura's proprietary electromagnetic transducer
technology. The joint venture, established to operate and manufacture within
India, is owned 49% by the Company and 51% by K&K Enterprises. In connection
with the agreement, Aura granted to K&K Enterprises, an exclusive license to use
Aura's patented and proprietary technology. As consideration for the license to
K&K Enterprises, the Company will receive license fee payments quarterly over
the life of the patent. Scheduled payments for the first five years total
approximately $2.9 million, of which $500,000 was received in Fiscal 1996. Aura
has fully contributed to the above and, subsequent to year end, the joint
venture is now in production and shipping the product. K&K obtained part of
their rights under this joint venture in a novation executed by Twilight
International, a former joint venture (Thailand) partner with the Company.

Without any changes to the terms the two joint ventures were merged
after the end of the fiscal year into one joint venture encompassing both. The
new venture was renamed Dewan Aura.

. NASA

The Company, in Fiscal 1995, entered into an agreement with NASA
Langley Research Center, Hampton Virginia, for the joint development and
exploitation of Aura's new proprietary and patent pending material named
RAINBOW(TM). The material has shown itself to be an effective actuator by
producing 100 times more stroke than any other previously known piezoelectric
materials.

Under the terms of the agreement, NASA will provide a team of
applications engineers and all laboratory and measurement services needed to
advance the development of commercial applications for this new material. Aura
will supply the material and will manufacture all jointly developed
applications. For applications that will be solely developed by NASA, Aura will
have first rights to acquire an exclusive license for the applications. Under
all circumstances, Aura remains the exclusive supplier of the material. A first
applicant has produced a prototype fluid pump which has no moving parts other
than a set of Aura's RAINBOW(TM) wafer. The pump is currently undergoing
extensive evaluation and testing at NASA to completely characterize its
performance.

Competition

The Company is involved in the application of its technology to a
variety of products and services and as such, faces substantial competition from
companies offering different and competitive technologies.

11
<PAGE>

The Company believes the principal competitive factors in the markets
for the Company's products include market acceptance of its products, ability to
develop and market technologically advanced products, capability to develop,
produce, manufacture, and market products successfully (either alone or through
outside parties) and the ability to secure sufficient capital resources for the
often substantial periods between technological concept and commercialization.
The Company's ability to compete will also depend on its continued ability to
attract and retain skilled and experienced personnel, to develop and secure
patent and other protection for its technology and to exploit commercially its
technology prior to the development of competing products by others.

The Company competes with many companies that have more experience,
name recognition, financial and other resources and expertise in research and
development, manufacturing, testing, obtaining regulatory approvals, marketing
and distribution. Other companies may also prove to be significant competitors,
particularly through their collaborative arrangements with research and
development companies.

. Speakers

In the speaker application, the Company currently provides product in
four basic categories.

In the first category, the professional and high end of the market, the
Company believes its products to be the very best in the industry and is
competing for market share with JBL, EV, Peavey, RCE, TAD and Rainbus-Heinz,
among others. All of the above competitors, provide a fine system based on
traditional and conventional magnetic circuit. The Company provides a new
unconventional magnetic circuit which Aura believes provides a competitive edge
in performance.

In the second category of the market, which is referred to as
television and multimedia, the Company's technology provides superior sounding
speaker systems which do not require any magnetic shielding. While the Company
is experiencing continuous acceptance in the market place based on performance
and the magnetic shielding issues, it faces competition from numerous players
with conventional speaker designs such as Sony, Panasonic, Pioneer, Yamaha,
Altek Lansing and others.

In the third category, the Company currently provides products that can
be referred to as OEM transducers. In this category, the Company provides
speaker systems without cabinets that can be used by others in their speaker
system products. Here again, the system provided by the Company is superior in
performance, is naturally magnetically shielded and weighs on the average 33%
less than other equivalent systems. Here, the Company competes with Tenegan
Foster, Harmen and Panasonic, among many other smaller suppliers.

In the fourth category the Company provides its patented and
proprietary Bass Shaker(TM) in competition against large subwoofers that are
supplied by numerous companies such as JBL, Pioneer, Jensen. The Bass Shaker(TM)
is smaller, provides superior bass and does not generate large sounds. It is a
unique product in the market place.

. Actuated Mirror Array (AMA)

There are several competing technologies that are currently on the
market or under development to compete for the advanced display market. The
Company has competed with many of these technologies in its military scene
projector programs whereby direct experience of the relative merits of the
different approaches could be gauged. The key parameters which are considered in
judging displays are:

. Efficiency - How bright an image can be produced per watt of
electricity driving it?
. Maximum Brightness - Are there any physical effects that limit the
brightness of images able to be produced?
. Response Time - How quickly does the display respond to image
changes?
. Contrast Ratio - How many graduations of intensity can be shown?
. Physical Parameters - Weight and size of displays.
. Lifetime - How long can you expect the device to operate?
. Drive Complexity - How expensive in cost and complexity is it to
drive the display electronically?

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<PAGE>

Other parameters such as display resolution are not significant
discriminates, as any of the technologies could be manufactured to any required
resolution.

DMD - Texas Instruments Digital Micro-mirror Device (DMD), is the
closest display concept to the AMA. It consists of arrays of micro-mirrors which
are bent out of the way of a light source to project an on or off image spot. By
controlling the relative on and off time of a spot, the intensity is increased
or decreased to provide an image. This is called Pulse Width Modulation (PWM).

A significant advantage of this technology is that it is fabricated
from Silicon micro machine technology as an integrated structure. This
technology is mature and has had much funding from the U.S. Government.

A significant disadvantage is lack of position control on the mirrors
causing a need for PWM techniques. The result is a very large complexity in
drive electronics and requirements for high speed electronics and mechanical
structures. The technology also limits the mirror size that can be manufactured
thus limiting light efficiency. TI's mirrors are 16 microns in size as compared
to the 100 micron size for an Aura mirror. These limitations cause a limit on
brightness and dynamic range which cannot be independently maintained so that
improvements in dynamic range can be made only by limiting brightness.

The DMD and AMA can be summarized as follows:

Comparison Item: TI'S DMD AURA'S AMA
- ---------------- -------- ----------
<S> <C> <C>

Image generation technique: Pulse Width Modulation Intensity Modulation

Light Efficiency: Low - limited by micro- Very high - due to
mirror size large mirror size

Maximum Brightness: Large - limited due to Very large - no
heating of the electronics practical limit known.

Complexity: High - 10 transistors per Low - only 1
pixel required. transistor per pixel
</TABLE>

LCD - Liquid Crystal Display technology has been under development for
a number of years in U.S. military and overseas commercial display markets.
Companies such as Hughes Aircraft, JVC and Sharp are world acknowledged leaders
in these technologies. Limitations of LCD's have caused them to make their major
effect on the computer and small display market despite enormous efforts to move
into the large screen displays.

Weaknesses of the technology include limited response time. 50 Hz
images are about as fast as LCD's can readily change images. This greatly
reduces their overall utility in television use where 60 Hz and faster are
desired image rates. To obtain fast rates, image quality is sacrificed. LCD's
must be viewed close to straight on causing users to need to sit close to the
front of the set as the intensity falls rapidly as one moves to the side. LCD's
have strong limits on maximum intensity and are moderate to low in light
efficiency. If one tries to increase the power of the projection lamp, one can
burn out the liquid crystal elements.

CRT - Cathode ray tubes are the oldest technology for display
production. Companies such as Sony, manufacture both traditional CRT's and a new
variety called projection CRT's. Other producers of CRT's include Mitsubishi and
Sharp.

The major disadvantage of CRT's is that they cannot be made very large
without a huge penalty in weight and size. The largest CRT produced provides a
60 inch image and weighs approximately 500 pounds. Devices such as this are not
practical in the home. Large images have been produced by making mosaic arrays
of smaller screens. These types of displays have annoying lines through the
image and have limited resolution. Of significant advantage, is that the
display cost is lower that any other device currently on the market. As

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<PAGE>

requirements for large resolution images grow, the CRT reaches limits of light
it can collect into a viewing area and thus starts having intensity
limitations.

. NewCom Products

NewCom is the Company's division specializing in the manufacturing and
selling of leading edge high performance computer communication and multimedia
products for the IBM compatible and Apple Macintosh personal computer markets.
NewCom offers a line of products including, among others, internal data fax
modems, speaker phones and multimedia sound solution, specifically to use with
AuraSound(TM) speaker systems.

In the fax modem area, the Company offers a product with advanced
features at a competitive price. Competitors are Boca, Zoom, Practical
Peripherals, US Robotics, GVC, Logicode and others. In the sound solution area,
the Company offers a superior product with over 40 watts of power at competitive
pricing. Competitors are Acer, Aztech Labs, Creative Labs, Diamond, Logitech and
others. In the multimedia-kit market, the Company competes with Diamond,
Creative Labs, Media Vision, Reveal, Aztech Labs and numerous other suppliers.

. Electromagnetic Valve Actuation (EVA)

For over a decade, automotive engineers have been looking at technology
and techniques to achieve variable valve timing for internal combustion engines.
It is well known that variable valve timing has the potential to achieve
improvements in fuel consumption, reduction in pollution and down sizing of
engines by increasing their efficiency.

Historically, the first technological success has been by using
multiple camshafts, opening different valve trains. This approach provides two
or three different valve opening and closing profiles, by mechanically switching
between different camshafts. This approach has limited benefits and tends to be
expensive since camshafts require precision grinding. Also, the cost of such
systems doubles the cost of engine valving.

Another historical approach has been hydraulic or pneumatic valve
lifters. While this approach provides more flexibility than multi-cams, it
requires compressors and high pressure lines.

Finally, the Aura approach uses electromagnetic technology (see for
example Description of Business-Applications). The only competitor to the
Company in this area, is FEV in Germany. While both systems look mechanically
similar, they are quite different. The differences are in the control system and
in the magnetics. Aura provides an electronic closed loop control with soft
landing. This allows improved reliability for operational, lower power
consumption by the system as well as noise reduction. In a direct laboratory
comparison, the Company has demonstrated over 35% less power usage per valve
than FEV's approach.

Manufacturing

The Company currently manufactures all of its actuator products,
oscillators, ceramics, and professional speakers at its own facilities. The
Company is also having non professional and OEM speakers manufactured at a
facilities in China, Malaysia and India. The Company has subcontracted the
manufacture and assembly of other product to several different suppliers on a
purchase order basis.

The facility in China is operated by Guoguang Electric Co. in
Guangzhou, China, a supplier which is unaffiliated with the Company. Speakers
are produced in this facility on a purchase order basis. Speakers are currently
also produced in the joint ventures in Malaysia and India on a purchase order
basis. The production of the Bass Shaker(TM), is done in India and Mexico.

Product Development Expenditures

During the fiscal years ended February 29, 1996, February 28, 1995, and
February 28, 1994, the Company spent approximately $5,226,000, $2,036,000 , and
$2,286,000 respectively, on Company sponsored research and

14
<PAGE>

development activities. The Company plans to continue its research and
development activities and may incur substantial costs in doing so.

Patents

Since Aura is engaged in the development and commercialization of
proprietary technology, it believes patents and the protection of proprietary
technology are important to its business. The Company's policy is to protect
its technology by, among other ways, filing patent applications to protect
technology which it considers important to the development of its business. The
U.S. Patent Office has to date issued 50 patents to Aura and has allowed 5
patent applications which will issue as patents. These patents expire between
the years 2007 to 2013. Of the issued patents and allowed applications, 28
pertain to its electromagnetic actuator applications, 17 pertain to its electro-
optics applications, 3 pertain to its communication technology applications, and
7 pertain to miscellaneous applications. In addition, the Company has 28 patent
applications pending, 18 of which originated from its magnetic actuators, 6 from
its electro-optics applications, 2 from its communication technology
applications, and 2 from its miscellaneous patents. An additional 47 patent
applications are in various stages of preparation for filing. There are no
assurances that any new patents will be issued in the future, or that if issued,
such patents will provide significant proprietary protection, or that they will
not be challenged or replaced by superseding technology. The Company believes
that its issued and allowed patents enhance its competitive position in
electromagnetic actuators and electro-optics applications. The Company intends
to file additional patent applications, when appropriate.

Employees

As of May 24, 1996, the Company employed 325 persons on a full-time
basis and believes that its relationship with its employees is satisfactory. The
Company is not a party to any collective bargaining agreements.

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<PAGE>

ITEM 2. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Company desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and hereby
invokes such provisions. The Company wishes to caution readers that important
factors, in some cases, have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual consolidated
results for the first quarter of Fiscal 1997, and beyond, to differ materially
from those expressed in any forward-looking statements made by, or on behalf of
the Company.

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

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

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

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

ITEM 3. PROPERTIES

The Company owns a 46,000 square foot headquarters facility located in
El Segundo, California, constructed in the late 1980's. The building
acquisition and improvements of $3.1 million were financed principally with the
Company's 7% Secured Convertible Non-Recourse Notes Due 2000 which were fully
converted into Common Stock in April 1991. The Company completed a similar note
issuance program in Fiscal 1993 which raised $5.5 million. The borrowings are
secured by a Deed of Trust on the property. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". The Company also
owns a 24,600 square foot manufacturing facility located in El Segundo,
California. The building was acquired from an unrelated party for $2.05 million
with a $1.5 million note secured by a 1st trust deed carried by the seller.
During Fiscal 1996, the Company also acquired from an unrelated party, a 4,000
square foot building in Artesia, California for $250,000.

The Company also leases a 22,000 square foot manufacturing facilities
in El Segundo, California on a month to month basis at a current annual base
rent of $162,000 and an 8,900 square foot manufacturing facility in Laguna
Niguel, California, under a lease expiring April 30, 1997 at a current annual
base rent of $64,416. Another 5,000 square foot facility is maintained in Van
Nuys, California on a month to month lease at a rate of

16
<PAGE>

$1,482 per month. The Company also leases an approximately 38,000 square foot
facility in New Hope, Minnesota. The lease has a five year term expiring in June
1998 with options to renew for two additional five year terms and requires lease
payments of approximately $15,200 per month. The Company leases an approximately
33,000 square foot facility in Westlake Village, California for its NewCom
operation at approximately $15,000 per month and an approximately 15,230 square
foot facility in Westlake Village, California for Electrotec at approximately
$9,000 per month. The Company also leases a 5,000 square foot facility in
Nashville, Tennessee. In addition, the Company through its joint venture in
Malaysia, owns 49% of the factory consisting of approximately 1.8 acres of land
and 18,000 square feet of building, located in Kangar, Malaysia. The Company
operates offices in Guangzhou, China; Hong Kong; London, England; Moscow, Russia
and a show room in Brussels, Belgium. In total the Company has over 220,000
square feet of facilities and believes that they are adequate for its present
needs.

ITEM 4. LEGAL PROCEEDINGS

Contingencies

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

Intergroup Arbitration
----------------------

The Company filed its general denial and affirmative defenses to the
Demand on March 27, 1995. Additionally, the answering statement includes the
Company's counterclaims that InterGroup has breached the vibration
isolation/noise cancellation license for failure to remit to the Company the
final payment of the license fee of $500,000 due on or before February 28, 1995;
breached and repudiated the simulator license agreements; breached the simulator
joint venture agreement; breached each Master Distributorship Agreement; and
breached the playground equipment agreement and license for failure to remit to
the Company $30,000 due for payment of the license fee. In addition to the above
stated monetary damages, the counterclaim further seeks declaratory relief and
damages in quasi contract.

The parties have entered into a definitive settlement of this matter on
May 28, 1996. The parties will file a stipulated dismissal of the action or
other appropriate pleading and seek to have an order dismissing the action
entered by the arbitration panel. The settlement provides for the cancellation
of the Joint Venture Agreement, and does not have any effect on the financial
condition of the Company.

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

On May 17, 1995 two lawsuits naming Aura, certain of its directors and
executive officers and a former executive officer as defendants, were filed in
the United States District Court for the Central District of California (Case
Nos. CV-95-3296). Both complaints (the "Complaints") purport to be class
actions on behalf of all persons who purchased common stock of Aura during the
period from May 28, 1993 through January 17, 1995, inclusive (the "Class
Period"). The Complaints allege that as a result of false and misleading
information disseminated by the defendants, the market price of Aura's common
stock was artificially inflated during the Class Period. Specifically, the
Complaints allege that (i) in its periodic reports filed with the SEC during the
Class Period and/or certain public announcements made during that period, the
Company increased its reported revenues by overstating products sales and
certain licensing fees and (ii) the Company misstated the sophistication and
quality of, and

17
<PAGE>

commitments for the Company's "Interactor Vest." The Complaints request damages
in an unspecified amount under certain federal securities laws. The Company
believes that this action is frivolous and that it has meritorious defenses to
all these claims. The Company filed motions to dismiss the complaints on August
4, 1995. The plaintiffs did not oppose the motions to dismiss but instead filed
a consolidated amended complaint on September 1, 1995. On October 2, 1995, the
Company filed its motion to dismiss the consolidated amended complaint. On
November 20, 1995, the court dismissed the consolidated amended complaint
without prejudice and granted plaintiffs 10 days leave to amend. Plaintiff's
filed their second amended complaint on December 5, 1995. The Company filed
motion to dismiss the second amended complaint on December 22, 1995. At a
hearing on the defendant's motion on January 16, 1996, the Court denied the
motion.

On February 16, 1996, the Company filed its motion for summary
judgment. At a hearing on the summary judgment motion on April 15, 1996, the
court granted the Company's motion. Judgment for the Company and all defendants
dismissing the action was entered on April 16, 1996. Plaintiffs filed a Notice
of Appeal to the judgment on May 16, 1996.

SEC Claims
----------

As previously reported, the SEC began an investigation relating to Aura
in 1992. The Staff of the SEC's Division of Enforcement ("Staff") has advised
Aura that it intends to recommend to the Commission the institution of civil
enforcement proceedings against Aura, Mr. Kurtzman and a former officer. The
Staff is not claiming that Mr. Kurtzman or anyone else personally benefited in
any way from these events, nor is the Staff alleging that these events had any
material impact on Aura's financial results. Accordingly it is anticipated by
Aura and its outside counsel that resolution of this matter will not require
Aura to restate any of its previously issued financial statements or otherwise
require it to amend any of its prior reports filed with the SEC. Neither is it
anticipated by Aura and its outside counsel that the Staff will seek any
monetary penalties from Aura, Mr. Kurtzman or the former officer.

The events giving rise to the Staff's intent to recommend an
enforcement action concern the reporting of two subject in reports previously
filed with the SEC in Fiscal 1993 and Fiscal 1994. Aura's outside counsel has
been meeting with the Staff in an effort to resolve this matter. However, there
can be no assurance that such a resolution will be achieved.

The first subject, for which the Staff has indicated it intends to
allege violations of the reporting and the books and records provisions of the
securities laws, relates only to the business that Aura engaged in with Micro
Computer Distribution Power ("MCDP"). The Staff claims that, in addition to
disclosing that MCDP was a significant customer of Aura's, Aura should have
disclosed more details about the nature of the transactions. As disclosed in
later filings, these transactions, which generated little or no profit, were
part of Aura's long range strategy to develop relationships with manufacturers,
suppliers and distributors for a series of computer related applications that
Aura has since introduced into the market. The transaction had no material
impact on Aura's reported loss.

The second subject, for which the Staff has indicated it intends to
allege violations of the reporting, the books and records and the anti-fraud
provisions of the securities laws, related to Aura's original reporting in its
form 10-Q for the nine months ending November 30, 1993, on its business
arrangement with John Jory Corporation ("Jory"). In 1994, Aura's form 10-Q for
November 30, 1993, was amended with respect to the Jory transaction. Most of the
revenue and expenses originally reported from the Jory transaction were excluded
from Aura's financial statements for the year ended February 28, 1994. This
adjustment had no material impact on Aura's reported losses.

Other Litigation
----------------

The Company is also engaged in other legal actions arising in the
ordinary course of business. In the opinion of management based in part upon the
advice of counsel, the ultimate resolution of these matters will not have a
material adverse effect. Therefore, no provision for these matters has been made
in the Company's consolidated financial statements.

18
<PAGE>

ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its annual meeting August 23, 1995. At such meeting
the Shareholders elected an eight member Board of Directors.

The number of votes cast for and against the election of Directors was as
follows:
<TABLE>
<CAPTION>

Name For Against Abstain
---- --- ------- -------
<S> <C> <C> <C>

Zvi Kurtzman 42,676,386 -- 135,325
Arthur Schwartz 42,708,171 -- 135,325
Anthony Cascio 42,718,316 -- 135,325
Cipora Kurtzman Lavut 42,650,336 -- 135,325
Norman Reitman 42,711,491 -- 135,325
Neal Kaufman 42,718,716 -- 135,325
Harvey Cohen 42,715,091 -- 135,325
Phillip Saffman 42,717,316 -- 135,325

</TABLE>

19
<PAGE>

PART II

ITEM 6. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

From November 1988 to June 1992 Aura Common Stock was quoted on the
NASDAQ quotation system under the trading symbol "AURA". From March 1987 until
November 1988, Aura's Common Stock was traded over-the-counter but was not
quoted in any automated quotations system of a registered securities
association. On May 21, 1991 Aura shares became listed on the NASDAQ National
Market System.

Set forth below are high and low sales prices for the Common Stock of
Aura for each quarterly period in each of the three most recent fiscal years
through May 30, 1996. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions in the Common Stock. The Company has approximately 1950
stockholders of record as of May 30, 1996.

Period High Low
------ ---- ---
<S> <C> <C>

Fiscal 1995

First Quarter ended May 31, 1994 $9.00 $6.50
Second Quarter ended August 31, 1994 9.31 7.00
Third Quarter ended November 30, 1994 7.88 3.94
Fourth Quarter ended February 28, 1995 5.38 3.06

Fiscal 1996

First Quarter ended May 31, 1995 5.69 3.00
Second Quarter ended August 31, 1995 5.56 4.19
Third Quarter ended November 30, 1995 8.25 4.50
Fourth Quarter ended February 29, 1996 6.75 4.06

Fiscal 1997

First Quarter through May 26, 1996 5.56 3.94
</TABLE>

On May 30, 1996, the average high and low reported sales price for the
Company's Common Stock was $4.44.

Dividend Policy

The Company has not paid any dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Therefore, the Company does not anticipate paying any dividends on its Common
Stock in the foreseeable future.

20
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following Selected Financial Data has been taken or derived from
the audited consolidated financial statements of the Company and should be read
in conjunction with and is qualified in its entirety by the full consolidated
financial statements, related notes and other information included elsewhere
herein.

AURA SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>

February 29, February 28, February 28, February 28, February 29,
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 82,259,010 $44,214,242 $ 16,369,825 $ 11,005,379 $11,134,502
------------ ----------- ------------ ------------ -----------
Cost of goods and overhead 71,849,204 30,064,935 13,714,813 10,605,654 7,488,192
Research and development expenses 5,225,735 2,037,467 2,286,051 2,813,018 2,040,662
General and administrative expenses 31,569,954 14,407,919 6,259,748 6,402,428 5,277,936
Provision for contract losses -- 133,261 17,133 183,597 435,267
Equity losses from AMS investment/1/) -- -- 9,454 511,923 649,355
------------ ----------- ------------ ------------ -----------
Total costs and expenses 108,644,893 46,643,582 22,287,199 20,516,620 15,891,412
(Loss) from operations (26,385,883) (2,429,340) (5,917,374) (9,511,241) (4,756,910)

Other income and expense:

Interest expense (income) net (298,793) 220,539 301,928 133,876 42,925
Class action litigation and
other settlement -- -- 4,375,000 -- --
------------ ----------- ------------ ------------ -----------
Net (loss) $(26,087,090) $(2,649,879) $(10,594,302) $( 9,645,117) $(4,799,835)
============ =========== ============ ============ ===========
Net (loss) per common share $(.48) $(.07) $(.35) $(.36) $(.19)
============ =========== ============ ============ ===========
Weighted average number of
common shares 53,860,527 37,217,673 30,117,742 26,881,421 25,837,069
============ =========== ============ ============ ===========

February 29, February 28, February 28, February 28, February 29,
Balance Sheet Data 1996 1995 1994 1993 1992
------------ ----------- ------------ ------------ -----------
Working capital $ 71,362,882 $33,796,181 $ 11,353,783 $ 3,593,473 $ 4,906,224
Total assets 134,080,568 73,467,003 37,564,037 22,695,481 20,158,394
Total liabilities and deferrals 34,917,462 19,213,584 19,488,244 15,439,765 4,634,002
Net stockholders' equity 99,163,106 54,253,419 18,075,793 7,255,716 15,524,392
</TABLE>
- ------------------------------
/1/) In the fiscal years ended February 28, 1994, February 28, 1993 and February
29, 1992, the Company reported the results of Aura Medical Systems, Inc. on
the equity method. In the fiscal years ended February 29, 1996 and February
28, 1995 they were consolidated.

21
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

General

The Company has completed its transition from U.S. government
contracting as its principal business activity to development and commercial
application of proprietary technologies. The Company has reported a net loss for
each of its five most recent fiscal years, and to date, has not exploited
commercial products to the extent necessary to achieve profitability.

Fiscal 1996 as Compared to Fiscal 1995

Gross revenues in Fiscal 1996 increased to $82,259,010 from $44,214,242
in Fiscal 1995. The increase was primarily due to sales of sound related
products as well as computer related products. Interactor sales contributed
approximately $3.0 million as compared to approximately $21.0 million in Fiscal
1995. Revenues from U.S. Government were negligible for both Fiscal 1995 and
1996. Revenues from development contracts in Fiscal 1996 were under $40,000
compared to $577,000 in Fiscal 1995. License fee revenues in Fiscal 1996 were
approximately $2.3 million as compared to $5.8 million in Fiscal 1995. License
agreements have a pronounced effect on operating results as associated direct
costs are insignificant. At the same time, the nature of the transactions
underlying these revenues means that such revenues are likely to be erratic and
difficult to predict.

Sales of computer related products to a single unrelated third party
were $20.6 million or 25.1% of revenues. No sales to this customer occurred in
prior fiscal years. Sales to this customer are expected to decline as a
percentage of revenues in Fiscal 1997 as the Company expands its customer base.
Even though the Company does not have any long term agreement with this customer
it has no reason to believe that sales to this customer will be abruptly
curtailed. The Company does not believe that any loss of sales to this
customer would have a material effect in Fiscal 1997. Sales to Micro Computer
Distributing declined to $3.5 million or 4.3% in Fiscal 1996 from $7.4 million
or 17% in Fiscal 1995. The following table summarizes and compares the revenue
contributions.

<TABLE>
<CAPTION>
(In Millions)
------------------------------------
1996 % 1995 %
------------------------------------
<S> <C> <C> <C> <C>

.Product Development $ 0 0% $ .6 1.3%
.License Fee 2.3 2.8% 5.8 13.2%
.Sound Related Products 19.0 23.0% 1.9 4.3%
.Computer Related Products 45.0 54.7% 8.8 19.9%
.Interactor and Cushion 4.0 4.9% 21.0 47.5%
.Services .5 .7% 1.3 2.9%
.Other Electromagnetic Principle
(Include.
U.S. Gov't.) 11.4 13.9% 4.8 10.9%
- --------------------------------------------------------------------------------
TOTAL $82.2 100% $44.2 100%
- --------------------------------------------------------------------------------
</TABLE>

The net loss for Fiscal 1996 was $26.09 million as compared to $2.65
million for Fiscal 1995. Approximately $17.0 million of the loss was due to the
Interactor and $3.5 million of the loss was from the NewCom operation. The
following table summarizes the main cost items of the Interactor.

Millions
--------
<S> <C>

Advertising $ 5.5
Trade Shows 1.0
Bad Debts 2.5
Warehouse & Shipping 1.0
Personnel 4.7
Asset Valuation 1.5
Misc. Sale Expenses .6
Severance package .2
-----
Total $17.0
</TABLE>

22
<PAGE>

The loss from NewCom was mostly due to the inventory write-down and
adjustment of approximately $2.0 million. The additional loss in NewCom was due
to the Superbowl advertisement that cost approximately $600,000 to produce and
$900,000 to air across the nation on T.V.

The loss in Fiscal 1996 was mostly due to 4th quarter charges. The
following table summarizes the main 4th quarter charges that contributed to the
loss.

Millions
--------
<S> <C>

Total Advertising $ 7.0
Trade Shows 1.5
Bad Debts 4.1
Returns and Allowances 1.2
Inventory Valuation 2.1
Asset Valuation 1.9
Research & Development 3.3
----
Total $21.1
</TABLE>

Returns and allowances increased from $1,770,029, or 4% of gross
revenues in Fiscal 1995 to $5,170,160, or 6.3% of gross revenues in Fiscal 1996.

Cost of goods and overhead increased from $30,064,935 in Fiscal 1995 to
$71,849,204 in Fiscal 1996 due principally to the increased amount of goods
purchased to manufacture the Company's products.

Research and development costs for Fiscal 1996 increased to $5,225,735
as the Company continued to focus its attention on developing new products to
bring to market from $2,037,467 in Fiscal 1995. 4th quarter Research and
Development expense of $3,304,017 primarily focused on automotive applications
related to the FAS and SGS products.

General and administrative expenses increased from $12,771,151 in Fiscal 1995 to
$26,399,794 in Fiscal 1996 due partially to increased sales efforts advertising
and increased bad debt write-offs.

Bad debt expenses increased to approximately $4.1 million from $1.1
million. Of the bad debt expense, approximately $2.0 million was primarily a
result of customers who declared bankruptcy during the 4th quarter (Vitel = $1.7
million). The Company also increased its allowance for doubtful accounts to
approximately $2.0 million.

Net interest income was $298,793 in Fiscal 1996 as compared to an
expense of $220,539 in Fiscal 1995 due partially to an increase in available
cash for investments during the year.

Fiscal 1995 as Compared to Fiscal 1994

Gross revenues in Fiscal 1995 increased to $44,214,242 from $16,395,825
in Fiscal 1994, or 270% primarily as a result of the introduction of the
Company's Interactor product late in the second quarter of Fiscal 1995. The
revenue increase was also partially due to the acquisition of Electrotec
Productions, Inc. and the formation of NewCom, Inc.

Results of operations improved from a net loss of $10,594,302 to a net
loss of $2,649,879. The improvement was the result of the contribution margin
provided by the Interactor. Negatively impacting the results of operations were
advertising expenditures related to the Interactor of approximately $5,000,000,
including approximately $1,000,000 for the cost of producing the advertising,
and the increase in personnel required to operate and manage the Interactor
program.

23
<PAGE>

Revenues from U.S. Government contracts in Fiscal 1995 declined to less
than 1/2% of total revenues from approximately 4.6% in Fiscal 1994. See
"Business-Agreements-Government Contracts".

Revenues from fixed price development contracts declined to $572,000 or
approximately 1.3% of total revenues, as compared to $1,900,000 or 11.6% of
revenues in Fiscal 1994.

Sales to Microcomputer Distributing (an unrelated third party),
increased to $7,375,184 or approximately 17% of total revenues, compared to
$4,880,000 or 29.75% of total revenues in Fiscal 1994. Along with the
multimedia monitors, the Company is also selling its multimedia speakers and
Bass Shakers(TM), to Microcomputer Distributing. The Company is expanding its
presence in the computer products field with the sale of sound cards, fax modems
and multimedia kits through its recently formed subsidiary NewCom, Inc.

License fee revenue in Fiscal 1995 increased to $5,822,980 or
approximately 13% of revenues as compared to $2,750,000 or 16.8% of revenues in
Fiscal 1994. (See "Business-Agreements"). License agreements have a pronounced
effect on operating results as associated direct costs are insignificant. At
the same time, the nature of the transactions underlying these revenues means
that such revenues are likely to be erratic and difficult to predict. However,
the Company believes that revenue from licensing of its technology may increase
as more applications of the Company's technology are licensed to third parties.

The following table summarizes and compares the revenue contributors for Fiscal
1995 and Fiscal 1994.

In Millions
-----------------------------------------------
1995 % 1994 %
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
.U.S. Gov't $ .1 .2% $ .8 4.9%
.Product Development .6 1.3% 1.9 11.6%
.License Fee 5.8 13.2% 2.8 17.1%
.Sound Related Products 1.9 4.3% .5 3.0%
.Computer Related Products 8.8 19.9% 4.9 29.9%
.Interactor 21.0 47.6% -- --
.Services 1.3 2.9% -- --
.Other Electromagnetic Principle 4.7 10.6% 5.5 33.5%
- --------------------------------------------------------------------------------
TOTAL $44.2 100% $16.4 100%
- --------------------------------------------------------------------------------
</TABLE>

Revenues in Fiscal 1995 of approximately $27.6 million or 62.4% of
total Fiscal 1995 as compared with revenues of $6.1 million or 37.2% of the
prior year are attributable to a variety of products using electromagnetic
principles. DRO and similar devices (see "Business-Technology") contributed
approximately $1.8 million in Fiscal 1995 and $2.5 million in the prior year.
Piezoelectric material (See "Business-Agreements-Aura Ceramics, Inc.")
contributed approximately $1.8 million in Fiscal 1995; as compared to, $1.2
million in the prior year. Speakers contributed approximately $1.9 million in
Fiscal 1995 as compared to $500,000 in Fiscal 1994. The Interactor(TM)
contributed approximately $21 million is Fiscal 1995 with no comparable sales in
Fiscal 1994.

Overall, cost of revenues rose to $30,064,935 in Fiscal 1995 from
$13,714,813 in Fiscal 1994, due primarily to the cost of parts and materials for
the Company's products.

Research and development costs for Fiscal 1995 declined by $248,584 as
the Company continued to focus its attention on bringing its products to market.
However, the Company anticipates that research and development expenditures may
rise in the future as the Company attempts to find yet more applications for its
technology.

General and administrative costs increased by $6,497,634 for Fiscal
1995 as compared to Fiscal 1994 due largely to advertising expenditures of
approximately $5,000,000 and the addition of the Company's two new subsidiaries,
Electrotec Productions, Inc. and NewCom, Inc.

Bad debt expense increased to $1,091,450 from $117,040 as the Company
increased its allowance for doubtful accounts to $1,192,500.

24
<PAGE>

Net interest expense declined to $220,539 in Fiscal 1995 from $301,928
in Fiscal 1994 due partially to an increase in cash available for investment
during the year and partially to additional conversions of the Company's Secured
7% Convertible Bonds.

General

During the past three fiscal years inflation and changing prices have
not had a material negative impact on the Company's revenues or income from
continuing operations and management does not anticipate any material negative
impact of inflation and changing prices on the Company's net revenues or on
income from continuing operations.

Liquidity and Capital Resources

Net working capital increased by $37,566,701 to $71,362,882 at Fiscal
1996 year end, with the current ratio increasing to 4.37:1 from 3.24:1. The
principal differences in the Company's accounts from February 28, 1995 to
February 29, 1996 are an increase in cash and equivalents of $18,072,864, an
increase in receivables of $9,178,666, an increase in inventories of $10,844,934
and an increase in accounts payable and an increase in accrued expenses of
$9,126,053. Included in current liabilities in Fiscal 1995 is $5,720,000 related
to the class action settlement. This amount represents the settlement liability
to the plaintiffs in the various class action lawsuits brought against the
Company which was paid out in Fiscal 1996.

The Company's cash balances were $21,900,364 at February 29, 1996,
$3,827,500 at February 28, 1995 and $9,559,681 at February 28, 1994 (of which
$5,000,000 was in temporary escrow). Through May 25, the Company has collected
approximately $13 million against outstanding receivables as of February 29,
1996.

The net cash used in operating activities of $36,404,179 increased by
$8,116,621 due to the increase in parts purchased to manufacture the Company's
various products the increased level of receivables resulting from the sales
increase and the increased inventory levels required to meet expected sales.

The level of inventories has increased due to the expanding product
base of the Company and the need to have parts available to manufacture
different items, such as the Bass Shaker, speakers, and computer peripherals as
required.

In Fiscal 1996 the Company invested $2,439,106 in various joint-
ventures, compared to $22,921 in the prior year. In Fiscal 1996 the Company
invested $3,570,000 in Telemac Cellular Corp.. The Company also invested
$500,000 in Aquajet Corp. which it is using as a testing ground for the
Company's engine component products. The Company chose this investment in order
to provide a harsh engine environment for the testing of these products.

In Fiscal 1996, the Company raised $64,734,656 through the sale of
stock and payment for certain inventory and fixed assets, $100,000 from the
exercise of warrants and $656,932 from the exercise of stock options, thereby
increasing total stockholders equity by approximately 83% to $99,163,106 from
$54,253,419. The Company also received net proceeds of $9,175,000 from the
issuance of convertible notes payable.

Spending for property and equipment amounted to $7,301,729 in Fiscal
1996, $5,577,858 in Fiscal 1995, and $637,509 in Fiscal 1994. Of the Fiscal
1996, 1995 and 1994 amounts, $363,274, $257,246 and $266,895 respectively, was
due to the manufacture of tooling and the remainder was due to the expansion of
facilities and purchases of equipment which was necessary in connection with
research and development activities, services performed under various
subcontracts and manufacturing requirements.

25
<PAGE>

The Company's cash flow generated from operating activities has not
always been sufficient to fund its working capital needs. In the past, the
Company has relied upon external sources of financing to maintain its liquidity,
principally private and bank indebtedness and equity financing. No assurances
can be provided that these funding sources will be available in the future. The
Company currently intends that funding required for future growth, operations or
any joint ventures entered into would occur through a combination of existing
working capital, operating profits, bank credit lines and favorable financial
terms from vendors.

As previously mentioned, the nature of the Company's business has
shifted from predominantly government funded development to design and
manufacture of commercial products. In Fiscal 1997, the Company expects its
results to be favorably impacted by expanded speaker manufacturing activities,
the expansion of selling activities of the Company's Bass Shaker, and the
bringing to market of the Company's automotive products. Additionally, computer
related products sold by the Company's subsidiary, NewCom, Inc., are expected to
increase as vendor relationships and supply lines become more fully developed.
The extent of manufacturing undertaken by the Company versus the use of
subcontractors or joint venture partners will influence the level of capital
required for future expansion. Going forward the Company intends to focus on its
four core businesses: Sound, Automotive, Displays and Computer products.

Current fixed monthly expenses corporate wide average approximately
$1,800,000, principally for labor, overhead, travel and professional fees.

The Company leases space located in El Segundo, Laguna Niguel, Westlake
Village, and Van Nuys, all in California and in New Hope, Minnesota, and
Nashville, TN. Minimum monthly rents under the leases approximate $62,000.
Rent expense was approximately $905,000 for Fiscal 1996, $525,000 for Fiscal
1995, and $320,000 for Fiscal 1994. Assuming no lease termination's or lease
extensions, rent expense is expected to be approximately $715,000 for Fiscal
1997, $675,000 for Fiscal 1998, $525,000 for Fiscal 1999, and $450,000 for
Fiscal 2000. The Company has no other material long-term capital commitments.

Recently Issued Accounting Pronouncements

In March 1995, the Financial Accounting Standards Board issued SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which becomes effective in Fiscal 1997. Management
believes that the adoption of SFAS No. 121 will not have a material impact on
the Company's financial position or results of operations.

In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation". The Company does not intend
to change its accounting for stock-based compensation, but it will make the
additional disclosures in Fiscal 1997 as required by SFAS No. 123.

26
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification of Directors

The following table sets forth all of the current directors, executive
officers and key employees of Aura, their age and the office they hold with the
Company. Executive officers and employees serve at the discretion of the Board.
All directors hold office until the next annual meeting of stockholders of the
Company and until their successors have been duly elected and qualified.

Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Directors
---------
Zvi Kurtzman 49 CEO/President
Arthur J. Schwartz, Ph.D. 48 Executive Vice President
Cipora Kurtzman Lavut 40 Senior Vice President,
Corporate Communications
Neal B. Kaufman 51 Senior Vice President
Harvey Cohen 63 Director, member of Audit
and Compensation
Committees
Norman Reitman 73 Director, member of Audit
and Compensation Committees
Anthony T. Cascio 46 Senior Vice
President-General Counsel
Phillip Saffman 65 Director

<CAPTION>
Other Executive Officers and Key Employees
------------------------------------------
<S> <C> <C>
Steven C. Veen 40 Senior Vice President-Chief
Financial Officer
Gregory Um, Ph.D. 48 President Aura Display
Keith O. Stuart 40 President Tech Center
Ronald J. Goldstein 55 President Aura Automotive
C. Rogers Saxon 49 Senior Vice President
Worldwide Sales
Gerald S. Papazian 40 Senior Vice
President-Administration
Richard Van Allen, Ph.D. 49 President Aura Industrial
David Sun 41 President Sound Systems
Sultan Khan 51 President NewCom
Jacob Mail 46 Vice President Operations
Planning
</TABLE>

Zvi Kurtzman has been the CEO/President and a director of the Company since
February 1987 and devotes his full time to the Company. Mr. Kurtzman has served
as the President of Innovative Information Services, Inc. (IIS), whose business
was primarily computer assisted control systems, since 1982 and served as
Cyphermaster, Inc. (CMI), a computer software company, President from 1984 to
1988. IIS and CMI are wholly owned subsidiaries of the Company. Mr. Kurtzman
has also served as a director of IIS and CMI since 1982 and 1984, respectively.
Mr. Kurtzman obtained his B.S. and M.S. degrees in physics from California State
University, Northridge in 1970 and 1971, respectively, and completed all course
requirements for a Ph.D. in theoretical physics at the University of California,
Riverside. He was employed as a senior scientist with the Science Applications
International Corp. a scientific research company in San Diego, from 1984 to
1985 and with Hughes Aircraft Company, a scientific and aerospace company, from
1983 to 1984. Prior thereto, Mr. Kurtzman was a consultant to major defense
subcontractors in the areas of computers, automation and engineering.

Arthur J. Schwartz, Ph.D. has been the Executive Vice President and director of
the Company since February 1987 and the Executive Vice President and a director
of CMI since 1984. Dr. Schwartz devotes his full time to the Company. In
addition, Dr.Schwartz was appointed President of IIS in 1988 after having
served as its Executive

27
<PAGE>

Vice President since 1984. Dr. Schwartz has also served as a director of IIS
since 1984. Dr. Schwartz obtained his M.S. degree in physics from the University
of Chicago in 1971 and a Ph.D. in physics from the University of Pittsburgh in
1978. Dr. Schwartz was employed as a Technical Director with Science
Applications International Corp., a scientific research company in San Diego,
California from 1983 to 1984 and was a senior physicist with Hughes Aircraft
Company, a scientific and aerospace company, from 1980 to 1984. While at Hughes,
he was responsible for advanced studies and development where he headed a
research and development effort for new technologies to process optical signals
detected by space sensors.

Cipora Kurtzman Lavut was appointed Senior Vice President Corporate
Communications in December 1991. She previously served as Vice President in
charge of Marketing and Contracts for the Company since 1988 and was appointed
director of the Company in 1989. Ms. Kurtzman was the Director of Contracts and
Marketing for CMI, a computer software company where she served from 1985 to
1988. She graduated in 1984 from California State University at Northridge with
a B.S. degree in Business Administration. Ms. Kurtzman-Lavut is the sister of
Zvi Kurtzman.

Neal B. Kaufman was appointed as a director in 1989, is Senior Vice President of
Aura, where he has served since 1988. Prior thereto, he has served as President
and Vice President of CMI since 1984 and 1988, respectively. Mr. Kaufman has
also been a director of CMI since 1984. Mr. Kaufman graduated from the
University of California, Los Angeles, in 1967 where he obtained a B.S. in
engineering. He was employed as a software project manager with Abacus
Programming Corp., a software development firm, from 1975 to 1985 where he
headed a team of software specialists on the Gas Centrifuge Nuclear Fuel
enrichment program for the United States Department of Energy and developed
software related to the Viking and Marine projects for the California Institute
of Technology Jet Propulsion Laboratory in Pasadena, California.

Harvey Cohen has been a director of the Company since August 1993. Mr. Cohen is
President of Margate Advisory Group, Inc., an investment advisor registered with
the Securities and Exchange Commission, and a management consultant since August
1981. Mr. Cohen has consulted to the Company on various operating and growth
strategies since June 1989 and assisted in the sale of certain of the Company's
securities. From December 1979 through July 1981, he was President and Chief
Operating Officer of Silicon Systems, Inc., a custom integrated circuit
manufacturer which made its initial public offering in February 1981 after
having raised $4 million in venture capital in 1980. From 1975 until 1979, Mr.
Cohen served as President and Chief Executive Officer of International
Communication Sciences, Inc., a communications computer manufacturing start-up
company for which he raised over $7.5 million in venture capital. From 1966
through 1975, Mr. Cohen was employed by Scientific Data Systems, Inc.
("S.D.S."), a computer manufacturing and service company, which became Xerox
Data Systems, Inc. ("X.D.S.") after its acquisition by Xerox in 1979. During
that time, he held several senior management positions, including Vice
President-Systems Division of S.D.S. and Senior Vice President-Advanced Systems
Operating of the Business Planning Group.

Norman Reitman has been a director of the Company since January 1989. Mr.
Reitman currently serves as an independent consultant to Kroll Associates, Inc.
an international investigative firm. Mr. Reitman obtained his B.B.A. degree in
business administration from St. Johns University in 1946 and became licensed as
a public accountant in New York in 1955. Mr. Reitman is the retired Chairman of
the Board and President of Norman Reitman Co., Inc., insurance auditors, where
he served from 1979 until June 1990. Mr. Reitman was a senior partner in Norman
Reitman Co., a public accounting firm, where he served from 1952 through 1979.
Mr.Reitman served on the Board of Directors and was a Vice President of
American Family Life Assurance Co., a publicly held insurance company, from 1966
until April 1991.

Anthony T. Cascio was appointed Senior Vice President, General Counsel, in
August, 1995. Mr. Cascio brings over 15 years of legal experience to the
Company. Mr. Cascio also maintains his prior appointment, made in December 1991
as Vice President, Intellectual Property, in December 1991 with authority over
all aspects of obtaining and enforcing Company patents and trademarks and
negotiating technology licenses and transfers. He previously served as Chief
Patent Counsel for the Company from June 1991 when he joined the Company. Mr.
Cascio, who has 14 years experience as an attorney, also provides certain of the
duties of General Counsel in the event of contractual relations and providing
litigation management other than securities litigation. Prior to joining

28
<PAGE>

Aura, Mr. Cascio was an Associate in the law firm of Poms, Smith, Lande & Rose,
Los Angeles, where he provided patent services for the company. Other positions
held by Mr. Cascio were Technology Counsel, Tandem Computers Incorporated, a
computer company in Cupertino and as an attorney with the law firm of Fitch,
Even, Tabin & Flannery (now McCubbery, Bartels, Meyer & Ward) San Francisco. Mr.
Cascio has a law degree from John Marshall School of Law, Chicago, and is
licensed to practice in California and Illinois. Mr. Cascio also has a Masters
of Science Degree in Electrical Engineering from the University of California,
Santa Barbara and a Bachelors Degree in Electrical Engineering from the
University of Illinois, Urbana.

Phillip Saffman is Theodore von Karmen Professor of Applied Mathematics and
Aeronautics at the California Institute of Technology. He was educated at
Trinity College, University of Cambridge, receiving the B.A. and M.A. degrees
and in 1956 the Ph.D degree in Applied Mathematics. In 1955, he was elected a
Prize Fellow of Trinity College. After holding faculty positions at Cambridge
University and King's College, University of London, he joined the Caltech
faculty in 1964. His scientific interests include turbulence, viscous flow,
vortex dynamics, interfacial dynamics, waves and super fluid Helium II. He has
published a monograph and over 170 scientific papers. In addition he has
supervised 34 Ph.D. students. Honours include Fellowship of the Royal Society
of London, Fellowship of the American Academy of Arts and Sciences, the Otto
Laporte award of the American Physical Society and the Fluid Dynamics award of
the American Institute of Aeronautics and Astronautics. He has acted as a
consultant for several Aerospace companies and Research Institutes.

Steven C. Veen a certified public accountant, was appointed Chief Financial
Officer in March 1994. He joined the Company as its Controller in December
1992. Prior to that, he had over 12 years experience in varying capacities in
the public accounting profession. Mr. Veen served from 1983 to December 1992
with Muller, King, Black, Mathys & Acker, Certified Public Accountants. He
received a B.A. in accounting from Michigan State University in 1981.

Gregory Um, Ph.D. is President of the Display Division. Dr. Um is in charge of
transforming technological ideas into commercial products. Dr. Um has 15 years
of experience in project management and industrial technical experience in the
fields of scene projection systems, sensor systems and analysis signal
processing algorithms, wavefront sensors, high energy laser pointing and
tracking systems, physics of thermodynamics and thermal properties. He is the
principal inventor of the Aura Systems scene projectors and has directed all of
the scene projector development efforts within the company. Prior to joining
Aura, Dr. Um was a Senior Scientist at Hughes Aircraft Co., a scientific and
aerospace company, with major achievements in the areas of sensors, optics, and
algorithms. Dr. Um has over 20 professional publications.

Keith O. Stuart was appointed President of the Research Center in 1995.
Previously he served as Vice President in charge of Hardware Development for
Aura since 1988 and as a Program manager for IIS in 1987. Mr. Stuart obtained
his B.S. and M.S. degrees in electrical engineering from the University of
California Los Angeles in 1978 and 1980, respectively. Mr. Stuart worked for
CMI during 1986 and was employed by Hughes Aircraft Company, a scientific and
aerospace company, prior thereto. Mr. Stuart has designed and fabricated
digitally controlled, magnetically supported gimbals that isolate the seeker
portion of a United States Space Defense Initiative and has also developed a
multi-computer automated test station for the evaluation of sophisticated
electro-optical devices.

Ronald J. Goldstein was appointed President of Automotive and joined Aura in
1989. He holds two M.S. degrees in Computing Technology and the Management of
R & D from George Washington University and has completed course work for a
Ph.D. in Nuclear Engineering from North Carolina State University. Mr.
Goldstein has over 25 years of experience in high technology both in government
and industry. Since 1989 Mr. Goldstein has been responsible for all marketing
and business development activities for the Company. Prior to joining Aura Mr.
Goldstein was Manager of Space Initiatives at Hughes Aircraft Company, a
scientific and research company, where he was responsible for the design,
production and marketing of a wide variety of aerospace systems and hardware.
Prior to joining Hughes in 1982, Mr. Goldstein was the Special Assistant for
National programs in the Office of the Secretary of Defense, and before that
held high level program management positions with the Defense Department and
Central Intelligence Agency.

29
<PAGE>

C. Rogers Saxon, Ph.D. was appointed Senior Vice President-Worldwide Sales in
1995. Dr. Saxon's responsibility is sales for existing products by winning
market position while implementing a successful marketing, distribution, and
sales plan. Prior to his assignment, Dr. Saxon managed the Advanced Computing
of Aura Systems. In that capacity, he managed a staff that developed and
marketed monitoring and control software for use in the aerospace and
construction fields. Before joining a predecessor of Aura in 1985, Dr. Saxon
held various technical and program management positions in the aerospace
industry. Dr. Saxon received his B.S. degree in mathematics from Harvey Mudd
College in 1966, an M.A. degree in operations research from Claremont Graduate
School in 1977 and M.A. and Ph.D. degrees in cognitive psychology from the
University of California, Irvine in 1982 and 1985, respectively.

Gerald S. Papazian is the Company's Senior Vice President-Administration. He
joined Aura Systems in August 1988 from Bear Stearns & Co., an investment
banking firm, where he served from 1986 as Vice President, Corporate Finance in
the Investment Banking Division. Prior to joining Bear Stearns, Mr. Papazian
was an Associate in the law firm of Stroock & Stroock & Lavan. His educational
qualifications include a B.A., Economics, University of Southern California,
1977 and a J.D./M.B.A., University of California, Los Angeles, 1981.

Richard E. Van Allen, Ph.D. is President of Aura Industrial. At Aura, his
responsibilities have ranged from the development of a variety of
electromagnetic actuators to a magnetic device for performing cataract surgery.
He received his B.S. in Aeronautical and Astronautical Engineering in 1968 from
Purdue University. Dr. Van Allen then went on to complete an M.S. and Ph.D. in
Astronautics from Purdue University in 1969 and 1977, respectively. From 1973
until 1983, Dr. Van Allen worked at the NASA/CAL Tech Jet Propulsion Laboratory,
where he was the navigation Team Leader for the Voyager mission which
successfully explored the outer planets of the solar system. He then spent
seven years at Hughes Aircraft Company, where he was Manager of the Mission
Requirements Laboratory. Dr. Van Allen managed several advanced studies
associated with the design of large space systems. He was also involved in
major systems studies of defensive satellites and kinetic energy weapons for
strategic defense, where he acted as Mission Definition Manager.

David Sun is President of the Sound Division. He was the founder and President
of Sun Computers, Inc., the sixth largest Apple distributor and reseller in the
world. He started the business and made it grow to over $110 million per year
in sales. Over the years, Mr. Sun established a significant network of high
technology companies throughout Asia and acted as a major consultant for
companies on both sides of the Pacific. A leader in the technology industry,
Mr. Sun is the recipient of numerous industry honors and serves on several civic
and academic board. Mr. Sun obtained his B.A. in Economics at UCLA and a M.B.A.
at Cal State Long Beach.

Sultan Khan has been President of NewCom, Inc. since 1994. He successfully
founded and grew Computer Peripherals, Inc. to a multi-million dollar sales
company before his departure. Under his leadership, the Company was at one time
an industry leader in modem communication products. Prior, at Texas Instrument
he was given the award for the most sales in one year and at Data Products was
responsible for development of a high speed band printer family of product. Mr.
Kahn received his B.S.E.E. at Cal Polytechnic Institute San Luis Obispo and a
M.B.A. at Cal Lutheran College.

Jacob Mail joined the Company in May 1995 and was appointed Vice President,
Operational Planning. Mr. Mail served over 20 years at Israeli Aircraft
Industries, starting as a Lead Engineer and progressing to Program manager. He
was responsible for the development and production of hydraulic actuation,
steering control systems, rotor brake systems and other systems and subsystems
involved in both commercial and military aircraft. Systems designed by Mr. Mail
are being used today all over the western world. In addition, Mr. Mail has
extensive experience in the preparation of technical specifications planning and
in organizing production in accordance with customer specifications at full
quality assurance.

30
<PAGE>

Family Relationships

Cipora Kurtzman Lavut, a Vice President and director, is the sister of
Zvi Kurtzman, who is the President and a director of the Company. Jacob Mail,
Vice President Operational Planning is a first cousin of Cipora Kurtzman Lavut
and Zvi Kurtzman. There are no other family relationships between any director
or executive officer.

Delinquent SEC Filings

None

31
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Cash Compensation For Executives

The following table summarizes all compensation paid to the Company's
Chief Executive Officer, and to the four most highly compensated executive
officers of the Company other than the Chief Executive Officer whose total
compensation exceeded $100,000 during the fiscal year ended February 29, 1996.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

Annual Long Term All Other
Compensation Compensation Awards Compensation*
------------ ------------------- -------------
<S> <C> <C> <C> <C>
Name and
Principal Position Year Salary Options/SARs
- ------------------ ---- ------ ------------

Zvi Kurtzman 1996 $191,791 0 $1,956
President 1995 155,673 0
1994 150,010 150,000

Arthur J. Schwartz 1996 $153,216 0 $1,218
Ph.D., Executive 1995 141,220 0
Vice President 1994 140,005 75,000

Neal B. Kaufman 1996 $146,350 0 $1,870
Senior Vice President 1995 140,342 0
1994 138,994 30,000

Keith O. Stuart 1996 $128,623 0 $ 913
President Aura Industrial 1995 125,857 0
1994 125,008 30,000

Gerald Kern 1996 $149,763 0 $1,777
President Aura Interactive 1995 40,230 0
1994 0 0

</TABLE>
- --------------------------
* Such compensation consisted of total Company contributions made
to the plan account of each individual pursuant to the Company's Employees Stock
Ownership Plan during the fiscal year ended February 29, 1996. See "EXECUTIVE
COMPENSATION-EMPLOYEES STOCK OWNERSHIP PLAN".

No cash bonuses or restricted stock awards were granted to the above
individuals during the fiscal years ended February 29, 1996, February 28, 1995
and February 28, 1994 Effective December 1992, the Company elected to begin to
compensate non-officer directors at the rate of $5,000 per year.

32
<PAGE>

The following table summarizes certain information regarding stock
options granted to the Company's Chief Executive Officer and to those other
executive officers named in the Summary Compensation Table during the fiscal
year ended February 29, 1996.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

Number % of Potential Realized
of Securities Total Value at Assumed
Underlying Options/SARS Exercise Annual Rates of
Options/ Granted to Price Stock Price
SARS Employees In Per Expiration Appreciation for
Name Granted Fiscal Year Share Date Option Term
- ---- ------- ----------- ----- ---- -----------------
<S> <C> <C> <C> <C> <C>
5% 10%,
-- ----

None Granted

</TABLE>

33
<PAGE>

The following table summarizes certain information regarding the
number and value of all options to purchase Common Stock of the Company held by
the Chief Executive Officer and those other executive officers named in the
Summary Compensation Table.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

Number of Unexercised Value of Unexercised
Options/SARs at Fiscal In-the-Money Options/
Name Year End SARs at Fiscal Year End*
- ---- ---------------------- ------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Zvi Kurtzman 350,000 120,000 $851,200 $ 65,900

Arthur Schwartz 226,000 89,000 $473,700 $113,350

Neal Kaufman 222,000 48,000 $522,080 $ 52,220

Keith Stuart 242,000 58,000 $615,600 $ 97,600

Gerald Kern 0 0 $ 0 $ 0

</TABLE>
*Based on the average high and low reported prices of the Company's Common
Stock on the last day of the fiscal year ended February 29, 1996.

No options were exercised by the above individuals during the fiscal year ended
February 29, 1996.

34
<PAGE>

Stock Options

1987 Stock Option Plan. Aura's 1987 Stock Option Plan for Non-
----------------------
Employee Directors (the "Directors Option Plan") was adopted by the Company in
1987. The Directors Option Plan is administered by an option committee of the
Board of Directors (the "Committee") and provides that options granted under the
Directors Option Plan will be non-statutory stock options. The maximum number
of shares of Common Stock available for grant under the Directors Option Plan is
500,000 shares. As of March 1, 1996, no shares remained available for future
grants under the Directors Option Plan.

Options may be granted under the Directors Option Plan to select non-
employee directors, other than members of the Committee. The Committee
determines the non-employee directors who receive options under the Directors
Option Plan, designates the number of shares subject to each option and makes
all other determinations necessary or advisable for the administration of the
Directors Option Plan. Options may have a maximum term of no more than five
years and the Committee has the discretion to make the options exercisable in
cumulative or noncumulative installments.

The exercise price of all stock options granted under the Directors
Option Plan must be at least equal to fifty percent of the fair market value of
the Common Stock on the date the option is granted. The exercise price may be
paid in cash, by cashier's or certified check, or by surrender of shares of
Common Stock. If an option expires, terminates or is canceled, the shares not
purchased thereunder may be optioned again. In Fiscal 1995, no shares of Common
Stock were granted under the Directors Option Plan.

1989 Stock Option Plan. Aura's 1989 Stock Option Plan (the "Option
----------------------
Plan") was adopted by the Board of Directors effective March 1, 1989 and was
approved by the stockholders on August 16, 1989. The Option Plan is
administered by an option committee of two or more persons selected by the Board
of Directors (the "Option Committee") and provides that options granted under
the Option Plan will be non-statutory stock options. The maximum number of
shares of Common Stock available for grant under the Option Plan is equal to the
greater of 8% of Aura's outstanding Common Stock from time to time or 4,170,000
shares.

Options may be granted under the Option Plan to selected employees and
directors, other than members of the Option Committee. The Option Committee
determines which employees and directors will receive options under the Option
Plan, designates the number of shares subject to each option and makes all other
determinations necessary or advisable for the administration of the Option Plan.
Options may have a maximum term of no more than ten years, and the Option
Committee has the discretion to make the options exercisable in cumulative or
noncumulative installments.

The exercise price of all stock options granted under the Option Plan
must be at least equal to the fair market value of the Common Stock on the date
the option is granted, except with respect to up to 150,000 shares which may be
granted at an exercise price of the lesser of the fair market value or $3.50.
The exercise price must be paid in cash. If an option expires, terminates or is
canceled, the shares not purchased thereunder may be optioned again.

Option for 475,000 shares were granted under the Option Plan in Fiscal
1996. Options to purchase 187,000 shares were exercised under the Option Plan
in Fiscal 1996.

Employees Stock Ownership Plan

The Company sponsors an Employees Stock Ownership Plan (the "Plan")
which constitutes an individual account plan as defined in Section 3(34) of the
Employee Retirement Income Security Act of 1974, as amended, and is intended to
qualify as a stock bonus plan under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). Part of the Plan also constitutes an employee
stock ownership plan under Section 4975(e)7 of the Code and the other part of
the plan constitutes a cash or deferred arrangement under Section 401(k) of the
Code. Each participant in the Plan may elect to defer a percentage of his
compensation and have the Company contribute it to the Plan for his benefit. If
a participant chooses to have the Company make such "Deferral

35
<PAGE>

Contributions" for his benefit, the Company will also make "Matching
Contributions" as described below. The Company may also make "Vested
Discretionary Contributions" and "Employees Stock Ownership Contributions" for
the benefit of participants as described below. An individual account will be
maintained in the Plan for each participant to reflect his interest in the Plan.
Each participant's benefit under the Plan, subject to the vesting rules
described below, is equal to the contributions allocated to the participant's
account, plus earning and forfeitures by other participants; and minus losses of
the Plan which are allocated to the participant's account. Benefits from the
Plan are generally distributable to a participant upon his retirement, total
disability, death or termination of employment with the Company. Any subsidiary
of the Company may adopt the Plan with the consent of the Company. Employees of
the Company who were employed on March 1, 1989 are eligible to participate in
the Plan and new entrants may participate on semi-annual entry dates of March 1
and September 1 after 90 days of continuous service.

Each eligible participant may elect to make Deferral Contributions in
an amount of at least 4% but not more than 12% of his compensation (or, in the
discretion of the Plan's administration committee, 1%, 2% or 3% of his
compensation). Such Deferral Contributions are withheld from the participant's
compensation. A participant's Deferral Contributions for any calendar year,
however, cannot exceed $9,500 currently (adjusted annually for cost of living
increases). Under the Plan, not more than $150,000 of compensation (adjusted
annually for increases in the cost of living) is taken into account for any
participant for any fiscal year.

The Company will make a Matching Contribution of $.20 for each $1.00
of Deferral Contributions made by a participant which do not exceed 7% of his
compensation. Matching Contributions and earnings thereon are fully vested and
nonforfeitable at all times. For the fiscal year ended February 29, 1996, the
Company made Matching Contributions to the accounts of all participants in the
amount of $39,615.26.

The Company may make Employees Stock Ownership Contributions to the
Plan in an amount determined in the Company's discretion, which will be
allocated to participants who are employed by the Company on the last day of the
fiscal year. For the fiscal year ended February 29, 1996, the Company made no
Employees Stock Ownership Contributions to the Plan. The Plan provides for
vesting at the rate of 20% for each fiscal year of service completed by
participants.

The Company has not yet made any Vested Discretionary Contributions
for the fiscal year ended February 29, 1996. The Company intends to make such
Vested Discretionary Contributions only if necessary to satisfy certain
requirements of the Code. If the Company makes such Vested Discretionary
Contributions, such contributions will be allocated to participants who complete
1,000 hours of service with the Company during the fiscal year and who were
employed by the Company on the last day of the fiscal year. Such Vested
Discretionary Contributions are fully vested and at all times.

Contributions to the Plan and earnings thereon will be invested
primarily in Common Stock of the Company. The Plan may acquire such Common
Stock from the Company or any other source, such as purchases on the open market
at prevailing market prices. The Plan will generally be funded by contributions
from the Company and participants as described above. The Plan may also borrow
funds to finance the purchase of Common Stock of the Company. Only Common Stock
of the Company may be used as collateral for such a loan, and a creditor of such
a loan will generally have the right to reach only the Common Stock of the
Company which constitutes the collateral.

36
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
Company's Common Stock owned as of May 24, 1996 (i) by each person who is known
by Aura to be the beneficial owner of more than five percent (5%) of its
outstanding Common Stock, (ii) by each of the Company's directors and those
executive officers named on the Summary Compensation Table, and (iii) by all
directors and executive officers as a group:

Shares of Percent of
Common Stock Common Stock
Name Beneficially Owned Beneficially Owned

<S> <C> <C>
Zvi (Harry) Kurtzman 1,744,913 (1)(2) 2.80%

Arthur J. Schwartz 1,602,713 (1)(3)(4) 2.57%

Cipora Kurtzman Lavut 1,343,390 (5) 2.15%

Neal B. Kaufman 1,385,868 (1)(9) 2.22%

Keith O. Stuart 354,254 (7) *

Norman Reitman 552,142 (6) *

Harvey Cohen 368,942 (8) *

Phillip Saffman 0 *

Anthony T. Cascio 334,095 (10) *

All officers and directors as 8,955,979 14.39%
a group (17 persons)
</TABLE>

____________________
* Less than 1% of outstanding shares.

(1) Includes 175,000 shares held of record by Advanced Integrated Systems, Inc.

(2) Includes 400,000 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of May 31, 1996.

(3) Includes 250,400 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of May 31, 1996.

(4) Includes 32,000 shares held by Dr. Schwartz as custodian for his children,
to which Dr. Schwartz disclaims any beneficial ownership.

(5) Includes 240,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 1996.

(6) Includes 310,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 1996 and 12,500 shares owned by Mr.
Reitman's wife, as to which 12,500 shares he disclaims any beneficial ownership.

(7) Includes 242,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 1996.

(8) Includes 130,000 shares personally owned, of which 120,000 shares may be
purchased pursuant to options and convertible securities within 60 days of May
31, 1996. In connection with his investment advisory business, this amount also
includes 31,250 shares and 207,692 shares which may be purchased upon conversion
of 7%

37
<PAGE>

Secured Convertible Notes over which Mr. Cohen has voting and investment
control and as to which Mr. Cohen disclaims beneficial ownership.

(9) Includes 222,000 shares which may be purchased pursuant to options and
convertible securities exercisable within 60 days of May 31, 1996.

(10) Includes 212,000 shares which may be purchased pursuant to options
exercisable within 60 days of May 31, 1996.

The mailing address for each of these individuals is c/o Aura Systems,
Inc., 2335 Alaska Avenue, El Segundo, CA 90245.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In Fiscal 1996, no new transactions were entered into.

In Fiscal 1995, no new transactions were entered into.

38
<PAGE>

PART IV

ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS

(a) Documents filed as part of this Form 10-K:

1. Financial Statements
--------------------

See Index to Consolidated Financial Statements

2. Financial Statement Schedules
-----------------------------

See Index to Consolidated Financial Statements

3. Exhibits
--------

See Exhibit Index

(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant in the last
quarter of Fiscal 1995.

39
<PAGE>

INDEX TO EXHIBITS
-----------------

(1) 3.1 Certificate of Incorporation of Registrant.

(1) 3.2 Bylaws of Registrant.

4.1 Form of Warrant

(1) 10.1 Lease dated April 23, 1986, by and between Delphi Components,
Inc. and Birtcher Niguel.

(1) 10.2 Lease, dated April 3, 1987, between International Rectifier
Corporation and the Registrant.

(1) 10.3 Lease, dated February 1, 1986, between Plaza La Reina Office
Venture and the Registrant.

(2) 10.4 Convertible Promissory Note, dated October 27, 1987, between
Peter C. Jaquith and the Registrant.

(1) 10.5 Revolving Credit Agreement, dated November 1, 1987, between
Peter C. Jaquith and the Registrant.

(1) 10.6 Joint Venture Agreement, dated March 3, 1987, between
Cypher Master, Inc. and Innovative Information Systems, Inc.

(1) 10.7 Amendment to Revolving Credit Agreement, dated May 10, 1988,
between Peter C. Jaquith and the Registrant.

(1) 10.8 Aura Systems, Inc. 1987 Stock Option Plan for Non-Employee
Directors.

(1) 10.9 Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement.

(1) 10.10 Sub-Contract, dated May 2, 1988, between Computer Sciences
Corporation and the Registrant.

(1) 10.11 Purchase Order, dated May 10, 1988, between General Dynamics
Corporation and the Registrant.

(1) 10.12 Purchase Contract, dated May 26, 1988, between Boeing Aerospace
Company and the Registrant.

(1) 10.13 Cost-Plus-a-Fixed-Fee Research and Development Contract, dated
August 15, 1988, by and between the Registrant and California
Institute of Technology Jet Propulsion Laboratory.

(1) 10.14 Award Contract, dated August 31, 1988, between the Department of
the Air Force and the Registrant.

(2) 10.15 Deed of Trust and Assignment of Rents, dated as of February 27,
1989, by the Registrant in favor of Chicago Title Insurance
Company, as Trustee, for the benefit of City National Bank.

(2) 10.16 Indenture, dated as of March 1, 1989, between the Registrant and
Interwest Transfer Co., Inc. as Trustee, relating to the 7%
Secured Convertible Non-Recourse Notes due 1999.

(2) 10.17 Form of 7% Secured Convertible Non-Recourse Notes due 1999.

40
<PAGE>

(2) 10.18 Deed of Trust, Assignment of Leases and Rents and Fixture Filing,
dated as of March 1, 1989, by the Registrant in favor of Ticor
Title Insurance Company, as Trustee, for the benefit of Interwest
Transfer Co., Inc., as trustee under the Indenture.

(3) 10.19 Contract of Purchase and Sale and Escrow Instructions, between
the Registrant and Plazamerica, Inc.

(3) 10.20 Form of 7% Secured Convertible Non-Recourse Note due 2000.

(4) 10.21 1989 Stock Option Plan.

(5) 10.22 Development and Manufacturing Agreement, dated August 16, 1991,
between the Registrant and Echlin Inc.

(5) 10.23 Research and Development Agreement, dated July 20, 1992, between
the Registrant and Inventio AG.

(5) 10.24 Joint Development and License Agreement, dated August 24, 1992,
between the Registrant and Daewoo Electronics Co., Ltd.

(5) 10.25 Letter of Agreement, dated December 21, 1992, between the
Registrant and Global Investments, SA.

(10) 10.26 Preliminary Agreement dated May 25, 1993, between the Registrant
and Israel Aircraft Industries Limited.

(11) 10.27 Agreement, dated September 23, 1993, between the Registrant and
Burlington Technopole SDN. BHD.

(12) 10.28 Dedicated Supplier Agreement, dated December 2, 1993, between the
Registrant and Daewoo Electronics Co., Ltd.

(12) 10.29 Joint Venture and License Agreements, dated February 4, 1994,
between the Registrant and The Intergroup Corporation.

(13) 10.30 Form of 7% Secured Convertible Non-Recourse Note due 2002.

(14) 10.31 Agreement dated May 17, 1994 between the Company and Parviz
Nazarian.

(15) 10.32 Agreement dated August 4, 1994 between the Company and Fluid
Power Industries, Inc.

(15) 10.33 Purchase and sale agreement dated September 9, 1994 between the
company and Nuvo Corp.

(16) 10.34 Agreement dated February 20, 1995 between the company and Kunland,
Inc.

(16) 10.35 Agreement dated February 22, 1995 between the company and Zylux,
Inc.

10.36 Stock Purchase and Sale Agreement dated April 30, 1996 between
the Company and MYS Corporation

10.37 Joint Venture Agreement dated July 26, 1995 between the Company
and Microbell

(6) 16.1 Letter of Deloitte & Touche, dated June 26, 1992, commenting on
Item 4 of the Form 8-K filed by Aura Systems, Inc.

41
<PAGE>

(7) 16.2 Letter of KPMG Peat Marwick, dated November 20, 1991, regarding
change in certifying accountants.

(8) 21.1 Aura Systems, Inc. and Subsidiaries.

24.1 Power of Attorney

EX-27 Financial Data Schedule

(8) 28.1 Registrant's description of change in certifying accountants.

(1) Incorporated by reference to the Exhibits to the Registration
Statement on Form S-1 (File No. 33-19530).

(2) Incorporated by reference to the Exhibits in the Registrant's
Current Report on Form 8-K dated March 24, 1989 (File No. 0-17249).

(3) Incorporated by reference to the Exhibits to Post-Effective
Amendment No. 2 to the Registration Statement on Form S-1 (File No.
33-27164).

(4) Incorporated by reference to the Exhibits to the Registration
Statement on Form S-8 (File No. 33-32993).

(5) Incorporated by Reference to the Exhibit to the Registration
Statement on Form S-1 (File No. 35-57 454).

(6) Incorporated by reference to the Exhibits in the Registrant's
Report on Form 8 (amending the Registrant's Current Report on Form
8-K dated June 11, 1992) dated June 26, 1992 (File No. 0-17249).

(7) Incorporated by reference to the Exhibits in the Registrant's
Current Report on Form 8-K dated November 15, 1991 (File No. 0-
17249).

(8) Incorporated by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended February 28,
1991 (File No. 0-17249).

(9) Incorporated by reference to the Registrant's Current Report on
Form 8-K dated June 11, 1992 (File No.0-17249).

(10) Incorporated by reference to the Registrants Current Report in Form
10-Q dated May 31, 1993.

(11) Incorporated by reference to the Registrants Current Report in Form
10-Q dated November 30, 1993.

(12) Incorporated by reference to the Exhibits to the Registration
Statement on Form S-1 (File No.-33-57454).

(13) Incorporated by reference to the Exhibits to the registrants Annual
Report Form 10-K for the fiscal year ended February 28, 1994 (File
No. 0-172-49).

(14) Incorporated by reference to the Registrants Current Report in Form
10-Q dated May 31, 1994.

(15) Incorporated by reference to the Registrants Current Report in Form
10-Q dated August 31, 1994.

(16) Incorporated by reference to the Registrants Annual Report Form 10-
K for the fiscal year ended February 28, 1995 (File No. 0-172-49)

42
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

Dated: June 4,1996 AURA SYSTEMS, INC.

By: /s/Zvi Kurtzman
---------------
Zvi Kurtzman, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.

Signatures Title Date
- ---------- ----- ----

/s/Zvi Kurtzman June 3, 1996
- ---------------
Zvi Kurtzman President and Director
(Principal Executive Officer)

/s/Steven C. Veen
- -----------------
Steven C. Veen Senior Vice President, June 3, 1996
Chief Financial Officer
(Principal Financial and
Accounting Officer)

/s/Arthur J. Schwartz
- ---------------------
Arthur J. Schwartz Executive Vice President June 3, 1996
and Director

/s/Neal B. Kaufman
- ------------------
Neal B. Kaufman Senior Vice President and Director June 3, 1996

/s/Cipora Kurtzman Lavut
- ------------------------
Cipora Kurtzman Lavut Senior Vice President and Director June 3, 1996

/s/Norman Reitman
- -----------------
Norman Reitman Director June 3, 1996

/s/Harvey Cohen
- ---------------
Harvey Cohen Director June 3, 1996

/s/Anthony Cascio
- -----------------
Anthony Cascio Director June 3, 1996

/s/Phillip Saffman
- ------------------
Phillip Saffman Director June 3, 1996

43
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Index to Consolidated Financial Statements

<TABLE>
<S> <C>
Independent Auditors' Report on Consolidated Financial Statements and
Financial Statement Schedule F-2

Consolidated Financial Statements of Aura Systems, Inc. and Subsidiaries:

Consolidated Balance Sheets-February 29, 1996 and February 28, 1995 F-3 to F-4

Consolidated Statements of Operations-Years ended February 29, 1996,
February 28, 1995 and February 28, 1994 F-5

Consolidated Statements of Stockholders' Equity-Years ended
February 29, 1996, February 28, 1995 and February 28, 1994 F-6

Consolidated Statements of Cash Flows-Years ended February 29, 1996,
February 28, 1995 and February 28, 1994 F-7 to F-9

Notes to Consolidated Financial Statements F-10 to F-22

Consolidated Financial Statement Schedule:

II Valuation and Qualifying Accounts F-23
</TABLE>

Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
respective consolidated financial statements or notes thereto.

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Aura Systems, Inc.
El Segundo, California

We have audited the consolidated balance sheets of Aura Systems, Inc. and
subsidiaries as of February 29, 1996, and February 28, 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years ended February 29, 1996 and the related financial
statement schedule listed in the accompanying Index at item 14. These
consolidated financial statements, and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aura Systems, Inc.
and subsidiaries as of February 29, 1996, and February 28, 1995 and the results
of their operations and their cash flows for each of the three years ended
February 29, 1996, and the financial statement schedule presents fairly, in all
material respects, the information set forth therein, all in conformity with
generally accepted accounting principles.

PANNELL KERR FORSTER
Certified Public Accountants
A Professional Corporation
911 Wilshire Blvd.
Suite 1850
Los Angeles, CA 90017

May 28, 1996

F-2
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets
<TABLE>
<CAPTION>

February 29, February 28,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS

CURRENT ASSETS:

Cash and equivalents $ 21,900,364 $ 3,827,500

Receivables, net 37,512,564 28,333,898

Insurance proceeds in escrow for class action
settlement -- 1,720,000

Inventories and contracts in process 23,883,964 13,039,030

Prepayments to vendors 8,463,236 1,447,173

Other current assets 793,824 513,106
------------ -----------

Total current assets 92,553,952 48,880,707
------------ -----------

PROPERTY AND EQUIPMENT, AT COST 30,012,084 22,471,598

Less accumulated depreciation and amortization (6,698,849) (5,151,073)
------------ -----------
Net property and equipment 23,313,235 17,320,525

JOINT VENTURES 3,002,225 645,626

LONG-TERM INVESTMENTS 4,165,000 --

LONG-TERM RECEIVABLES 4,414,344 --

PATENTS, NET OF AMORTIZATION OF $273,843
AND $190,909 2,294,059 2,039,881

DEFERRED CHARGES 1,376,506 3,123,552

OTHER ASSETS, NET 2,961,247 1,456,712
------------ -----------
Total $134,080,568 $73,467,003
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.

F-3
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets
<TABLE>
<CAPTION>

February 29, February 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:

Notes payable $ 3,378,758 $ 545,006

Accounts payable 16,247,434 7,665,764

Accrued expenses 1,564,878 1,020,495

Accrued losses on contracts -- 133,261

Class action settlement -- 5,720,000
------------ ------------
Total current liabilities 21,191,070 15,084,526
------------ ------------

NOTES PAYABLE AND OTHER LIABILITIES 2,063,492 466,158
------------ ------------

CONVERTIBLE NOTES 11,662,900 3,662,900
------------ ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock par value $.005 per
share and additional paid in
capital. Issued and outstanding
62,222,438 and 43,073,634 shares
respectively. 166,845,201 95,826,986

Accumulated deficit (67,682,095) (41,573,567)
------------ ------------

Total stockholders' equity 99,163,106 54,253,419
------------ ------------

Total $134,080,568 $ 73,467,003
============ ============

</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended February 29, 1996, February 28, 1995 and February 28, 1994
<TABLE>
<CAPTION>

1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
GROSS REVENUES $ 82,259,010 $ 44,214,242 $ 16,369,825

LESS RETURNS AND ALLOWANCES (5,170,160) (1,770,029) (12,818)
------------ ------------- -------------
NET REVENUES 77,088,850 42,444,213 16,357,007

COST OF GOODS AND OVERHEAD 71,849,204 30,064,935 13,714,813
------------ ----------- -------------

GROSS PROFIT 5,239,646 12,379,278 2,642,194
------------ ----------- -------------

EXPENSES:
Research and development 5,225,735 2,037,467 2,286,051
General and administrative 26,399,794 12,771,151 6,273,517
expenses ------------ ----------- -------------

Total costs and expenses 31,625,529 14,808,618 8,559,568
------------ ----------- -------------

(LOSS) FROM OPERATIONS (26,385,883) (2,429,340) (5,917,374)

OTHER (INCOME) AND EXPENSES

Interest income (647,717) (123,721) (68,948)
Interest expense 348,924 344,260 370,876
Class action litigation -- -- 4,375,000
and other settlement ------------ ----------- -------------

NET (LOSS) $(26,087,090) $(2,649,879) $( 10,594,302)
============ =========== =============

NET (LOSS) PER COMMON SHARE $ (.48) $ (.07) $ (.35)
============ ============ =============

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 53,860,527 37,217,673 30,117,742
============ =========== =============

</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Years ended February 29, 1996, February 28, 1995 and February 28, 1994
<TABLE>
<CAPTION>

Common Stock Additional Accumulated Total
Shares Amount Paid-in Deficit
capital
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at February 28, 1993 27,290,167 136,450 $ 34,199,152 $(27,079,886) $ 7,255,716
Private placements, net of
issuance costs 2,396,000 11,980 9,693,498 -- 9,705,478
Issuance to ESOP 97,883 489 471,683 -- 472,172
Issuance of warrants -- -- 150,000 -- 150,000
Amortization of stock awards -- -- 66,557 -- 66,557
Secured notes payable converted 258,188 1,291 855,809 -- 857,100
Exercise of warrants 2,569,000 12,845 5,275,155 -- 5,288,000
Exercise of stock options 924,822 4,624 3,220,168 -- 3,224,792
Stock issued for non cash items 287,940 1,440 1,648,840 1,650,280
Net (loss) -- -- -- (10,594,302) (10,594,302)
---------- ------- ------------ ------------ ------------
Balances at February 28, 1994 33,824,000 169,119 55,580,862 (37,674,188) 18,075,793
Private placements, net of
issuance cost 8,416,434 42,083 36,087,123 -- 36,129,206
Issuance to ESOP 25,639 128 187,845 -- 187,973
Secured notes payable converted 292,093 1,460 978,540 -- 980,000
Exercise of warrants 45,000 225 224,775 -- 225,000
Exercise of stock options 206,000 1,030 789,422 -- 790,452
Stock issued for non cash items 165,000 825 921,797 -- 922,622
Shares cancelled (100,000) (500) (576,250) -- (576,750)
Stock issued to acquire assets 199,468 997 1,417,505 -- 1,418,502
Increase to deficit-AMS -- -- -- (1,249,500) (1,249,500)
consolidation

Net (loss) -- -- -- (2,649,879) (2,649,879)
---------- ------- ------------ ------------ ------------

Balances at February 28, 1995 43,073,634 215,367 95,611,619 (41,573,567) 54,253,419
Private placements, net of
issuance cost 16,749,725 83,749 59,843,541 59,927,290
Issuance to ESOP 49,046 245 240,788 241,033
Notes payable converted 289,106 1,446 1,284,148 1,285,594
Exercise of warrants 35,165 176 99,824 100,000
Exercise of stock options 206,000 1,030 655,902 656,932
Stock issued for non cash items 664,380 3,322 3,996,678 4,000,000
Stock issued to acquire assets 1,155,382 5,777 4,801,589 4,807,366
Foreign currency translation loss -- -- -- (21,438) (21,438)

-- -- -- (26,087,090) (26,087,090)
Net (loss) ---------- ------- ------------ ------------ ------------
Balances at February 29, 1996 62,222,438 311,112 $166,534,089 $(67,682,095) $ 99,163,106
========== ======= ============ ============ ============

</TABLE>
See accompanying notes to consolidated financial statements.

F-6
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years ended February 29, 1996, February 28, 1995 and February 28, 1994
<TABLE>
<CAPTION>

1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:

Net (loss) $(26,087,090) $ (2,649,879) $(10,594,302)
------------ ------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:

Class action settlement -- -- 4,000,000
Depreciation and amortization 4,246,133 3,172,410 1,564,643
Shares contributed to ESOP 241,033 187,973 472,172
Shares issued for services -- -- 246,875
Equity loss from investment in AMS -- -- 9,454
Reserve for recoverability of investment in AMS -- (203,996) --
Provision for environmental cleanup 33,765 28,550 21,250
Gain on disposition of assets -- -- (10,000)
Reduction of asset carrying value-Interactor 1,203,972 --
Shares issued for payment of inventory purchases 3,744,241 3,116,519 --

Assets-(Increase) Decrease:

Receivables (9,178,666) (22,100,384) (1,182,060)
Inventories and contracts in process (10,844,934) (10,306,911) (1,474,517)
Other current assets (7,296,782) (1,130,269) (154,885)
Patents (337,113) (466,415) (570,320)
Deferred charges (679,965) (2,553,726) (992,050)
Escrow proceeds -- 280,000 --
Other assets (441,535) 673,242 (337,215)

Liabilities-Increase (Decrease):
Accounts payable 8,581,670 3,994,228 (632,198)
Accrued expenses 544,383 (261,401) 24,374
Accrued losses on contracts (133,261) (67,469) 17,133
------------ ------------ ------------
Total adjustments (10,317,059) (25,637,649) 1,002,656
------------ ------------ ------------

(36,404,149) (28,287,528) (9,591,646)
Net cash (used) by operating activities ------------ ------------ ------------

Cash flows from investing activities:

Proceeds from sale of assets -- -- 10,000
Purchase of property and equipment (6,938,455) (5,320,612) (370,614)
Manufacture of special tools and equipment (363,274) (257,246) (266,895)
Purchase of subsidiary -- (439,000) --
Proceeds from sale of stock in AMS -- 1,000,000 --
Advances to AMS -- -- (285,452)
Investment in joint ventures (2,439,106) (22,921) (823,615)
Long-term investments (4,165,000) -- --
Long-term receivables (4,414,344) -- --
------------ ------------ ------------
Net cash (used) by investing activities (18,320,179) (5,039,779) (1,736,576)
------------ ------------ ------------

</TABLE>
See accompanying notes to consolidated financial statements

F-7
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:

Net proceeds from borrowings $ 3,131,039 $ 74,050 $ --

Repayment of notes payable (193,469) (182,693) (164,200)

Net proceeds from issuance of common stock 60,684,622 27,703,769 18,218,270

Cash placed into escrow -- -- (5,000,000)

Cash released from escrow -- 5,000,000 --

Net proceeds from issuance of stock warrants -- -- 150,000

Net proceeds from issuance of convertible 9,175,000 -- --
notes ---------- ---------- ----------

Net cash provided by financing activities 72,797,192 32,595,126 13,204,070
---------- ---------- ----------

Net Increase (Decrease) in cash and 18,072,864 (732,181) 1,875,848
equivalents

Cash and equivalents at beginning of year 3,827,500 4,559,681 2,683,833
---------- ---------- ----------
Cash and equivalents at end of year $21,900,364 $ 3,827,500 $ 4,559,681
========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 326,088 $ 353,514 $ 378,375
=========== =========== ===========
Income Taxes $ 6,400 $ 8,000 $ 6,400
=========== =========== ===========
</TABLE>
Supplemental disclosures of noncash investing and financing activities:

During the year ended February 28, 1994, the Company acquired assets in exchange
for the assumption of a liability for environmental cleanup, to which a value of
$300,000 has been assigned. See Note 3.

During the year ended February 28, 1995, the Company issued 165,000 shares of
common stock in connection with a consulting contract and the settlement of a
previously recorded liability. During the year ended February 28, 1995, the
Company also issued 1,497,700 shares of Regulation "S" restricted common stock
in consideration of previously recorded liabilities. During the year ended
February 28, 1994, the Company issued 274,036 shares of common stock in
connection with a consulting contract, a legal settlement with a former officer,
an employee severance matter and the settlement of a previously recorded
liability in connection with the repurchase of stock in AMS. The Company also
issued 13,904 shares of common stock to three individuals as consideration for
subordinating their holdings of the Company's Secured 7% Convertible debt.

During the year ended February 28, 1995, the Company acquired assets valued at
$1,418,502 for which it issued 199,468 shares of common stock. The assets
acquired were patent rights of $418,502 and the NewCom, Inc. acquisition of
assets of $1,000,000. See note 3(c). During the years ended February 29, 1996,
February 28, 1995 and February 28, 1994, the Company entered into financing
arrangements whereby it acquired assets for notes payable in the amount of
$1,678,343, $88,300 and $72,000 respectively.

During the year ended February 29, 1996, the Company acquired the 51% of
Auratech it did not own in exchange for the issuance of 315,000 shares of common
stock valued at $1,063,125. The Company also issued 637,380 shares of common
stock in settlement of a $4,000,000 previously recorded liability. The Company
issued 840,382 shares of common stock for the acquisition of assets valued at
$3,744,241. The Company also issued 42,105 shares of common stock for services
in connection with a private placement offering.

During the years ended February 29, 1996, February 28, 1995 and February 28,
1994, the Company contributed stock valued at nil, nil and $472,172
respectively, to its ESOP.

F-8
<PAGE>

During the years ended February 29, 1996 and February 28, 1995, nil and
$980,000, of 7% convertible secured notes were converted into nil, and 292,093
shares of common stock respectively. During the year ended February 29, 1996,
$1,250,000 of 9% convertible notes plus accrued interest were converted into
289,106 shares of common stock.

See accompanying notes to consolidated financial statements.

F-9
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years ended February 29, 1996, February 28, 1995 and February 28, 1994

(1) Business and Summary of Significant Accounting Policies
-------------------------------------------------------

Business
--------

The Company's main business is centered around the use of its patented and
proprietary technologies in the area of electro-magnetics. Most of its
products utilize the same basic principles of electro-magnetics and its
ability to provide a cheaper, cleaner, and/or more efficient alternative to
technologies currently in use.

Principles of Consolidation
---------------------------

The consolidated financial statements include accounts of the Company and
its wholly owned subsidiaries, Delphi Components, Inc., Aura CAD/CAM
Systems, Inc., Aura Ceramics, Inc., Electrotec Productions, Inc. (and its
wholly owned subsidiary Electrotec Europe), NewCom, Inc. and Auratech, Inc.
Additionally, the Company owned 61% of Aura Medical Systems, Inc. ("AMS") at
February 29, 1996, which is included in the 1995 and 1996 consolidated
financial statements. In consolidation, all significant intercompany
balances and transactions have been eliminated.

Revenue Recognition
-------------------

The Company recognizes revenue for product sales upon shipment. The
Company provides for estimated returns and allowances based upon experience.

The Company also earns a portion of its revenues from license fees, and
generally records these fees as income when the Company has fulfilled its
obligations under the particular agreement.

Cash Equivalents
----------------

The Company considers all highly liquid assets, having an original
maturity of less than three months, to be cash equivalents.

Fair Value of Financial Instruments
-----------------------------------

The Company's financial instruments consist of cash, accounts and notes
receivable, accounts payable, accrued expenses and notes payable. The
carrying value of these financial instruments approximate their fair value
at February 29, 1996.

Use of Estimates
----------------

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

Long-Term Investments
---------------------

Investments in equity securities with no readily determinable fair value
are stated at cost. Management periodically evaluates these investments as
to whether fair value is less than cost. In the event fair value is less
than cost, and the decline is determined to be other than temporary, the
Company will reduce the carrying value accordingly.

F-10
<PAGE>

Deferred Charges
----------------

The Company defers certain costs related to the preliminary activities
associated with the manufacture of its products, which the Company has
determined have future economic benefit. These costs are then amortized
over the initial production units, not to exceed 24 months. Management
periodically reviews and revises, when necessary, its estimate of the future
benefit of these costs, and expenses them if it is deemed there no longer is
a future benefit.

Inventories and Contracts in Process
------------------------------------

Inventories are stated at the lower of cost (first-in, first-out) or
market. A portion of the Company's inventories are attributable to long-
term contracts on which the related operating cycles are longer than one
year. In accordance with industry practice, these inventories are included
in current assets.

Per Share Information
---------------------

The consolidated net loss per common share is based on the weighted
average number of common shares outstanding during the year. Common share
equivalents have been excluded since inclusion would dilute the reported
loss per share.

Patents
-------

The Company capitalizes the costs of obtaining or acquiring patents.
Amortization of patent costs is provided for by the straight line method
over the shorter of the patents' legal or estimated economic life. If a
patent is rejected, abandoned, or otherwise invalidated the unamortized cost
associated with that patent is expensed in that period.

Joint Ventures
--------------

The Company initially records investments in joint ventures at cost.
These cost amounts are adjusted quarterly to reflect the Company's share of
venture income or losses. Because the joint ventures formed have not yet
had significant operations, equity is stated at cost.

Research and Development
------------------------

Research and development costs are expensed as incurred.

Advertising Costs
-----------------

Advertising costs are expensed as incurred. Advertising charged to expense
in Fiscal 1996 and 1995 approximated $7,000,000 and $5,000,000,
respectively, including approximately $900,000 and $1,000,000 for the
production of the advertising, which is continuing to be used but has been
expensed. Advertising costs prior to Fiscal 1995 were insignificant.

Buildings, Equipment and Leasehold Improvements
-----------------------------------------------

Buildings, equipment and leasehold improvements are stated at cost and are
being depreciated using the straight-line method over their estimated useful
lives as follows:

Buildings 40 years
Machinery and equipment 5-10 years
Furniture and fixtures 7 years
Leasehold improvements Life of lease

During 1996 and 1995, the Company capitalized costs of $363,274
and $257,246 respectively, on special tools and equipment, which have been
created for the manufacturing and development of actuators, speakers and
related products. The capitalized amounts, included in machinery and
equipment, include allocated costs of direct labor and overhead. The
Company expects recovery of these costs from orders.

F-11
<PAGE>

Depreciation and amortization expense of buildings, machinery and
equipment, furniture and fixtures and leasehold improvements approximated
$1,967,000, $1,591,000 and $1,095,000 for Fiscal 1996, 1995 and 1994,
respectively.

Reclassifications
-----------------

Certain reclassifications have been made to the 1994 and 1995
financial statements to conform with 1996 classifications. These
reclassifications have no effect on reported net loss amounts for 1994 and
1995.

<TABLE>
<CAPTION>
(2) Receivables
-----------

Receivables consist of the following:
1996 1995
---- ----
<S> <C> <C>

Commercial receivables:

Amounts billed $36,024,153 $22,275,881

Recoverable costs and accrued profits not billed 3,564,984 7,206,246
----------- -----------
Total commercial receivables 39,589,137 29,482,127

Receivables under U.S. Government contract: 289,774 287,830

Advances due from related parties 116,655 144,190
Less allowance for uncollectible receivables
and sales returns (2,483,002) (1,580,249)
----------- -----------

$37,512,564 $28,333,898
=========== ===========
</TABLE>

Bad debt expense was $4,153,990, $1,091,450 and $117,040, in Fiscal 1996,
1995 and 1994 respectively.

(3) Acquisitions
------------

(a) Aura Ceramics, Inc.
-------------------

In June 1993, the Company formed Aura Ceramics, Inc. to acquire the assets
of the Ceramics Center of Alliant Techsystems solely for the assumption of
liability for environmental cleanup with no current cash payments required.
The cost of environmental cleanup necessary has been estimated to be
$750,000 and would be payable upon vacancy of the leased premises. The
estimated cleanup cost was determined after consultation with an
engineering firm that has dealt with environmental cleanups at these types
of facilities. The lease has a term of 5 years, with options for renewal
for two additional 5 year periods. It is anticipated that the Company will
occupy the premises for 10 years and as such the Company has recorded an
initial value of $300,000 for the assets involved and a related liability
representing the amortized present value, included in Notes payable and
other liabilities, after application of a 9.25% discount rate, of the
future payment which may be required upon vacancy. Aura Ceramics, Inc.
began operations shortly after formation.

(b) Electrotec Productions, Inc.
----------------------------

The assets acquired consisted of current assets of $351,765 equipment of
$2,563,738, other assets of $129,512, and the assumption of liabilities of
$2,606,015.

The following summary, prepared on a proforma basis, combines the
consolidated results of operations as if Electrotec had been acquired as of
the beginning of the periods presented, after including the impact of
certain adjustments, such as amortization of intangibles.

F-12
<PAGE>

1995 1994
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
Net Revenues $46,402,225 $ 20,933,880
Net (Loss) $(2,607,566) $(10,518,129)
Net (Loss) per share $ (.07) $ (.35)

</TABLE>

In December 1995, Electrotec formed a wholly owned subsidiary, Electrotec
Europe, which then purchased the assets of Audio Lease, Ltd., a United
Kingdom based competitor, for approximately $670,000.

In June 1994, the Company formed NewCom, Inc. to acquire the assets of
Nuvo, Inc. In September 1994, the Company issued 133,333 shares of stock
valued at $1,000,000 in exchange for inventory, fixed assets, trademarks,
designs and tools.

(d) Long-Term Investments
---------------------

In Fiscal 1996 the Company invested $3,570,000 in Telemac Cellular Corp.
The Company also invested $500,000 in Aquajet Corp. which it is using as a
testing ground for the Company's engine component products. The Company
chose this investment in order to provide a harsh environment for the
testing of these products. The Company also made miscellaneous other
investments for $95,000.

(4) Joint Ventures and Other Agreements
-----------------------------------

(a) Daewoo Agreement
----------------

In August 1992, the Company entered into a definitive joint development and
licensing agreement with Daewoo Electronics Co., Ltd. to exploit certain of
the Company's AMA technology as it applies to the development of a high
resolution projection system for use in television sets. The agreement as
modified provides for the payment of a $1,500,000 licensing fee and
approximately $2,000,000 of reimbursement to Aura for development costs,
all of which has been received. Further, Aura is to receive royalties on a
scheduled basis per television set manufactured upon the commencement of
commercial production which is estimated to begin in calendar 1996. The
entire license fee has been received by the Company and recognized as
income as all technical milestones delineated in the agreement have been
achieved by the Company.

(b) Malaysian Joint Venture
-----------------------

On September 23, 1993, the Company entered into an agreement with
Burlington Technopole SDN. BHD., a Malaysian corporation ("Burlington"),
for the formation of a joint venture to manufacture and sell speakers using
Aura's proprietary technology. The joint venture, which has been named
Audiora Sound SDN. BHD and was established under Malaysian law to operate
in Malaysia, has the exclusive right to sell speakers using Aura technology
in the ASEAN countries and the non-exclusive right to sell such speakers in
the United States. Under the terms of the agreement, the Company owns 49%
of the joint venture and Burlington owns 51%. The capitalization of the
joint venture involves a total of $500,000 ($250,000 from each party) in
initial investments by the Company and Burlington. In addition Burlington
intends to borrow $8 million. The Company has granted all licenses as
necessary to enable the joint venture to manufacture the speakers, and in
return may receive up to $1 million in license fee, of which $500,000 was
collected in January 1994 and included in revenues. There is no further
obligation on the Company's part with regards to the license fee recorded
as income. The Company further agreed to purchase a minimum of 3 million
speakers per year (at an estimated cost of $5 million to $7 million) for
the five years following the start of production of the speakers at prices
equal to the wholesale market prices to the end users of the speakers.
Payment for these speakers will be made with a revolving letter of credit
based on 30 day revolving terms for each monthly purchase of speakers
(based on the previous month's shipment). The Company has not entered into
any contracts specifically for the purchase of these speakers. The
production facility has been completed and production runs began in
December 1995. At February 29, 1996, the Company's investment is $371,392
representing the initial investment plus other costs.

F-13
<PAGE>

In May 1994, the Company entered into an agreement to establish a joint
venture company with an unrelated group of investors to exploit machine
tool, robotic and industrial hand tool applications of the Company's
electromagnetic technology. The Company received 49% ownership of the joint
venture. Concurrently, the Company granted these investors a license for
the exclusive rights under Aura's patents and proprietary technology for
use in such applications. Consideration for the license was a nonrefundable
$1,000,000 fee, all of which has been received by the Company. The Company
has no further obligation with respect to this license. In Fiscal 1996, the
Company purchased the 51% of the joint venture from a group of investors
and now operates the former joint venture as a wholly owned subsidiary.

(d) K & K Enterprises Joint Venture (Speakers)
------------------------------------------

On July 19, 1995, the Company entered into an agreement with K&K
Enterprises for the formation of a joint venture to manufacture and sell
speakers using Aura's proprietary technology. K&K has obtained a license to
the Company's technology and will grant an exclusive sub-license to the
joint venture. The joint venture has the exclusive right to build and sell
speakers using Aura's technology in the Republic of Taiwan, Indian
Subcontinent, Middle East and the European market. The Company owns 49% of
the joint venture and K&K owns 51%. As consideration for the license to K&K
Enterprises, the Company will receive a $1,000,000 fee $400,000 of which
was received in Fiscal 1996. In addition, the joint venture could, at
Aura's discretion, build speakers for Aura's needs in other parts of the
world. The Company has committed to order twenty million speakers over a
seven year period as the Company shall determine in its sole discretion.
The speakers are needed to meet the Company's demand for multimedia
applications.

K&K enterprises obtained part of their rights under this joint venture in a
novation executed by Zylux Acoustic, a former joint venture partner with
the Company.

On July 12, 1995 the Company entered into an agreement with K&K
Enterprises, for the formation of a joint venture to manufacture Aura's
Bass Shaker/TM/, an audio enhancement sound system incorporating Aura's
proprietary electromagnetic transducer technology. The joint venture,
established to operate and manufacture within India, is owned 49% by the
Company and 51% by K&K Enterprises. In connection with the agreement, Aura
granted to K&K Enterprises, an exclusive license to use Aura's patented and
proprietary technology. As consideration for the license to K&K
enterprises, the Company will receive license fee payments quarterly over
the life of the patent. Scheduled payments for the first five years total
approximately $2.9 million of which $500,000 was received in Fiscal 1996.

The Company has agreed to purchase two hundred eighty thousand bass shakers
in the first year increasing to four hundred forty thousand units and five
hundred sixty thousand units in years two and three. Thereafter,
manufacturing commitments are now set at one hundred fifty thousand units
of bass shakers per quarter. Pursuant to the agreement: (I) Aura will
contribute to the new joint venture a working prototype of an exemplary
product the type to be manufactured; (ii) K&K will contribute a sublicense
of the rights and obligations under the exclusive license; (iii) Aura and
K&K will initially contribute $400,000 pro rata a paid in capital for the
share certificates to be issued and; (iv) Aura will provide training to K&K
personnel with reimbursement to Aura at cost. K&K Enterprises obtained part
of their rights under this joint venture in a novation executed by Twilight
International, a former joint venture (Thailand) partner with the Company.

Without any changes to the terms, the joint ventures were merged after the
end of Fiscal 1996 into one joint venture. The new venture was renamed
Dewan Aura.

(5) Related Party Transactions
--------------------------

Notes and advances due from related parties, aggregated $116,655 and
$144,190 at February 29, 1996 and February 28, 1995, respectively, included
in current receivables and $37,000 included in non-current receivables at
February 29, 1996.

F-14
<PAGE>

(6) Inventories and Contracts in Process
-----------------------------------

Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of the following:
<TABLE>
<CAPTION>

1996 1995
----------- -----------
<S> <C> <C>
Raw materials $19,898,783 $ 7,939,034
Finished goods 3,985,181 4,138,665
On consignment -- 961,331
----------- -----------
$23,883,964 $13,039,030
=========== ===========

(7) Property and Equipment
----------------------

Property and Equipment, at cost is 1996 1995
comprised as follows: ----------- -----------

Land $ 3,280,398 $ 2,000,000
Buildings 7,910,946 6,876,792
Machinery and equipment 16,640,339 12,479,321
Furniture, fixtures and leasehold
improvements 2,180,401 1,115,485
----------- -----------
$30,012,084 $22,471,598
=========== ===========

</TABLE>
(8) Deferred Charges
----------------

Deferred charges consist of expenses incurred by the Company in the pre-
production phase of its products. The charges relate to the Company's
Interactor product, 18" speaker, shaker pillow, Electromagnetic Valve
Actuator, Bass shaker and multi-media speakers. Amortization of these
charges commences upon initial production over a period of 24 months.
Amortization of the charges relating to the 18" speaker, the Interactor and
the Electromagnetic Valve Actuator began in Fiscal 1995, with amortization
of the remaining items beginning in Fiscal 1996. Amortization expense
related to the deferred charges totaled $1,588,316 in Fiscal 1996 and
$639,321 in Fiscal 1995. Due to management's change in focus away from the
Interactor product line, the balance of the Interactor deferred charges
were written off in Fiscal 1996.

(9) Notes Payable and Other Liabilities
-----------------------------------

Included in Notes Payable and Other Liabilities are Notes Payable which
consist of the following:
<TABLE>
<CAPTION>

1996 1995
---- ----
<S> <C> <C>
Note payable-Four Star acquisition (a) $ 33,842 $ 76,658
Notes payable-equipment (b) 1,127,186 290,706
Notes payable-individual (c) -- 294,000
Note payable-building (d) 1,500,000 --
---------- --------
2,661,028 661,364

Less: current portion 981,101 545,006
---------- --------
Long term portion 1,679,927 116,358
Reserve for environmental cleanup (See note 3) 383,565 349,800
---------- --------
$2,063,492 $466,158
========== ========

</TABLE>
(a) Note payable-Four Star acquisition consists of a note maturing on
February 15, 1998, bears interest at approximately 10% and is
collateralized by certain equipment.

(b) Notes payable-equipment consists of ten notes maturing at various dates
thru August 1999 bearing interest at various rates and are collaterized
by equipment.

(c) The amount in 1995 consisted of a note payable to a former shareholder
of Electrotec Productions, Inc., repaid in March 1995.

(d) Note payable-building consists of a 1st Trust Deed held by the seller
of the building, due in 2006.

F-15
<PAGE>

Annual maturities of long term notes payable are as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1997 $ 981,101
1998 526,609
1999 280,189
2000 10,383
2001 11,189
2002-2006 851,557
----------
$2,661,028
==========
</TABLE>

The Company has entered into a financing arrangement with a lender who is
providing a line of credit collateralized by NewCom's accounts receivable.
At February 29, 1996 the balance was $2,397,657, with a maximum of
$2,500,000. Subsequent to year end, the maximum was raised to $3,500,000.
The interest rate is approximately 9.5%.

(10) Convertible Notes Payable
-------------------------

Notes Due 2002
--------------

In Fiscal 1993, the Company issued its Secured 7% Convertible Notes due
2002 in the total amount of $5,500,000. The notes are secured by a first
lien on the Company's headquarters facility and are convertible at the
holder's option, into Aura's common stock at an average conversion price of
$3.38 per share. The loan agreement also provides for mandatory conversion
into common stock in the event the market price of the common stock exceeds
$10.00 per share for ten consecutive trading days.

Notes Due 1998
--------------

In Fiscal 1996, the Company issued $1,250,000 of unsecured 9% Convertible
Notes due December 31, 1998. The notes plus accrued interest of $35,594
were converted into 289,106 shares of common stock in Fiscal 1996.

In Fiscal 1996, the Company issued $8,000,000 of unsecured 5% Convertible
Notes due February 2, 1998.

(11) Accrued Expenses

<TABLE>
<CAPTION>
Accrued expenses consist of the following:
1996 1995
---- ----
<S> <C> <C>
Accrued payroll and related expenses $1,288,792 $ 785,387
Other 276,086 235,108
---------- ----------
$1,564,878 $1,020,495
========== ==========
</TABLE>
(12) Income Taxes
------------

At February 29, 1996, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $58 million and $29
million respectively, which expire through 2011.

Under SFAS 109 "Accounting for Income Taxes" the Company utilizes the
liability method of accounting for income taxes. Accordingly, the Company
has recorded a deferred tax benefit of approximately $23,000,000 for Fiscal
1996 and $13,000,000 for Fiscal 1995. The Company has also recorded a
valuation account to fully offset the deferred benefit due to the
uncertainty of the realization of this benefit.

(13) Common Stock, Stock Options and Warrants
----------------------------------------

The Company has 100,000,000 shares of $.005 par value common stock
authorized for issuance.

In April 1993, the Company completed a private placement of units
consisting of one share of common stock and a warrant to purchase one share
of common stock at an exercise price of $5.00 per share until June 30,
1998. A total of 770,000 units were sold at a price of $3.25 resulting in
gross proceeds of $2,502,500.

F-16
<PAGE>

In October 1993, the Company completed a private placement of units
consisting of one share of common stock, a warrant to purchase one share of
common stock at an exercise price of $5.00 per share until June 30, 1995.
The exercise period has been extended until June 30, 1996 and the price has
been increased to $6.00 per share. The Company also issued warrants to
purchase a share of the Company's common stock at $15.00 per share.

Remaining warrants outstanding to purchase Common Stock are 2,862,000 at an
average price of $8.78.

The Company has granted nonqualified stock options to certain directors and
employees. Options are granted at fair market value at the date of grant,
vest immediately, and are exercisable at any time within a five-year period
from the date of grant.

A summary of activity in the directors stock option plan follows:

<TABLE>
<CAPTION>
Shares Price
------ -----
<S> <C> <C>
Options outstanding at February 28, 1993 1,810,000 $1.44-4.00

Grants 200,000 4.00-5.50
Cancellations (65,000) 3.06
Exercises (840,422) 1.44-4.00
--------- ----------

Options outstanding at February 28, 1994 1,104,578 $1.44-5.50

Grants -- --
Cancellations -- --
Exercises (176,000) $4.00
--------- ----------

Options outstanding at February 28, 1995 928,578 $1.44-5.50

Grants 100,000 4.50
Cancellations -- --
Exercises (19,000) 4.00
--------- ----------

Options outstanding at February 29, 1996 1,009,578 $1.44-5.50
========= ==========
</TABLE>

(14) Employee Stock Plans
--------------------

The Company has two employee benefit plans: The Employee Stock Ownership
Plan (ESOP) and the 1989 Stock Option Plan (the Stock Option Plan). A
previous plan, the 1989 Employee Stock Ownership Plan, was terminated in
Fiscal 1992 and all plan assets were distributed to participants.

The ESOP is a qualified discretionary employee stock ownership plan that
covers substantially all employees. This plan was formally approved by the
Board of Directors during fiscal 1990. The Company contributed common stock
valued at nil, nil and $472,172 to the ESOP in Fiscal 1996, 1995 and 1994
respectively.

During Fiscal 1990, the Company's Board of Directors adopted the Stock
Option Plan, a nonqualified plan which was subsequently approved by the
shareholders. The Stock Option Plan authorizes the grant of options to
purchase the greater of up to 8% of the Company's outstanding common shares
or 4,170,000 common shares. Shares currently under option generally vest
ratably over a five year period.

F-17
<PAGE>

A summary of activity in the employee stock option plan is as follows:
<TABLE>
<CAPTION>

Shares Price
------ -----
<S> <C> <C>
Options outstanding at February 28, 1993 2,661,200 $1.44-7.25

Grants 1,490,000 3.50-7.31
Cancellation (21,600) 3.06-7.25
Exercises (84,400) 1.44-3.06
--------- ----------

Options outstanding at February 28, 1994 4,045,200 $1.44-7.31

Grants -- --
Cancellation (14,000) 1.44-3.06
Exercises (30,000) 1.44-7.25
--------- ----------

Options outstanding at February 28, 1995 4,001,200 $1.44-7.31

Grants 475,000 4.88-5.06
Cancellations (399,400) 3.00-7.31
Exercises (187,000) 3.06-7.25
--------- ----------

Options outstanding at February 29, 1996 3,889,800 $1.44-7.31
========= ==========

</TABLE>
(15) Leases
------

The Company leases office facilities and equipment under operating leases
that expire through Fiscal 2006. Other costs, such as property taxes,
insurances and maintenance, are also paid by the Company. Rental expense
charged to operations approximated $905,000, $525,000 and $320,000 in
Fiscal 1996, 1995 and 1994, respectively.

At February 29, 1996, minimum rentals under noncancellable operating leases
are as follows:
<TABLE>
<CAPTION>

Fiscal Year:
Gross Rents Sublease Net Rents
----------- ------------ ----------
<S> <C> <C> <C>
1997 $ 715,771 $104,728 $ 611,043
1998 674,465 104,728 569,737
1999 527,384 26,182 501,202
2000 450,303 -- 450,303
2001 203,857 -- 203,857
---------- -------- ----------
$2,571,780 $235,638 $2,336,142
========== ======== ==========
</TABLE>
(16) Proceeds from Sale of Stock in AMS
----------------------------------

As a result of a series of stock purchase transactions entered into as of
and subsequent to November 30, 1991 the Company reduced its ownership in
AMS to 49.7% of total shares outstanding by February 28, 1993.

Gross proceeds from the stock sale transactions aggregated $4,000,000 of
which $3,000,000 was paid in cash prior to February 28, 1993 with the
remaining $1,000,000 paid in Fiscal 1995. Included in this $4,000,000 was
the sale to a then director of the Company for $1,000,000. The $4,000,000
gross amount, less costs of $560,000 for shares purchased from other AMS
shareholders as part of this transaction, have been included in proceeds
from sale of stock in AMS and deferred on previously presented balance
sheets. The agreements under which the sale occurred contained provisions
whereby the shares purchased by these individuals are exchangeable for the
Company shares during the period from November 30, 1993

F-18
<PAGE>

through November 30, 1998, subject to certain "acceleration events" as
defined in the stock purchase agreements.

In November 1994, the individuals exercised their right to exchange their
stock in AMS for stock in the Company. AMS is consolidated in the Company's
financial statements as of February 29, 1996 and February 28, 1995 since
the exchange resulted in the Company owning a majority of the outstanding
shares of AMS as of February 28, 1995. The Company has elected not to
restate the consolidated financial statements for the prior years, due to
the immateriality of the amounts.

In addition to recording its equity share of the net losses of AMS in
fiscal years prior to Fiscal 1995, the Company provided a reserve of
approximately $204,000 against its investment in AMS in Fiscal 1993. As a
result of consolidation this reserve was reversed in Fiscal 1995.

(17) Significant Customers
---------------------

The Company sold computer products, speakers and Bass Shakers to seven
customers for the years ended February 1996, 1995 and 1994, which accounted
for approximately 48.8%, 17% and 30% respectively, of the Company's
revenues. In the 48.8% is included sales of computer related products to a
single unrelated third party which were $20.6 million or 25.1% of revenues.
No sales to this customer occurred in prior fiscal years. Sales to Micro
Computer Distributing declined to $3.5 million or 4.3% in Fiscal 1996 from
$7.4 million or 17% in Fiscal 1995.

(18) Contingencies
-------------

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

Intergroup Arbitration
----------------------

On March 14, 1995, the Intergroup Corp. filed against the Company a Demand
for Arbitration (Case No. 72 133 00276 95) before the American Arbitration
Association (AAA) in Los Angeles, California, under its commercial
arbitration rules. The Company filed its general denial, affirmative
defenses and counterclaim to the Demand on March 27, 1995. The Demand,
without benefit of supporting allegations, concludes "(B)reaches of
Licensing Agreements regarding vibration isolation/noise cancellation
technology...and platform motion simulators...and breach of Joint Venture
Agreement; breaches of Master Distributorship Agreements...in violation of
exclusivity provisions; Accounting...; Declaratory relief; Fraud." The
Demand does not contain any definite factual allegations in support of
these conclusions. Additionally, the answering statement includes the
Company's counterclaims that Intergroup has breached the vibration
isolation/noise cancellation license for failure to remit to the Company
the final payment of the license fee of $500,000 due on or before February
28, 1995; breached and repudiated the simulator license agreements;
breached the simulator joint venture agreement; breached each Master
Distributorship Agreement; and breached the playground equipment agreement
and license for failure to remit to the Company $30,000 due for payment of
the license fee. In addition to the above stated monetary damages, the
counterclaim further seeks declaratory relief and damages in quasi
contract.

The parties have entered into a definitive settlement of this matter on May
28, 1996. The parties will file a stipulated dismissal of the action or
other appropriate pleading and seek to have an order dismissing the action
entered by the arbitration panel. The settlement provides for the
cancellation of the Joint Venture Agreement, and does not have any effect
on the financial condition of the Company.

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

On May 17, 1995 two lawsuits naming Aura, certain of its directors and
executive officers and a former executive officer as defendants, were filed
in the United States District Court for the Central District of California
(Case Nos. CV-95-3296). Both complaints (the "Complaints") purport to be
class actions on behalf of all persons who purchased common stock of Aura
during the period from May 28, 1993 through January 17, 1995, inclusive
(the "Class Period"). The Complaints allege that as a result of false and
misleading information disseminated by the defendants, the market price of
Aura's common stock was artificially inflated during the Class Period.
Specifically, the Complaints allege that (i) in its periodic

F-19
<PAGE>

reports filed with the SEC during the Class Period and/or certain public
announcements made during that period, the Company increased its reported
revenues by overstating products sales and certain licensing fees and (ii)
the Company misstated the sophistication and quality of, and commitments
for the Company's "Interactor Vest." The Complaints request damages in an
unspecified amount under certain federal securities laws. The Company
believes that this action is frivolous and that it has meritorious defenses
to all these claims. The Company filed motions to dismiss the complaints on
August 4, 1995. The plaintiffs did not oppose the motions to dismiss but
instead filed a consolidated amended complaint on September 1, 1995. On
October 2, 1995, the Company filed its motion to dismiss the consolidated
amended complaint. On November 20, 1995, the court dismissed the
consolidated amended complaint without prejudice and granted plaintiffs 10
days leave to amend. Plaintiff's filed their second amended complaint on
December 5, 1995. The Company filed motion to dismiss the second amended
complaint on December 22, 1995. At a hearing on the defendant's motion on
January 16, 1996, the Court denied the motion.

On February 16, 1996, the Company filed its motion for summary judgment. At
a hearing on the summary judgment motion on April 15, 1996, the court
granted the Company's motion. Judgment dismissing the action was entered on
April 16, 1996. Plaintiffs filed a Notice of Appeal to the judgment on May
16, 1996.

SEC Claims
----------

As previously reported, the SEC began an investigation relating to Aura in
1992. The Staff of the SEC's Division of Enforcement ("Staff") has advised
Aura that it intends to recommend to the Commission the institution of
civil enforcement proceedings against Aura, Mr. Kurtzman and a former
officer. The Staff is not claiming that Mr. Kurtzman or anyone else
personally benefited in any way from these events, nor is the Staff
alleging that these events had any material impact on Aura's financial
results. Accordingly it is anticipated by Aura and its outside counsel that
resolution of this matter will not require Aura to restate any of its
previously issued financial statements or otherwise require it to amend any
of its prior reports filed with the SEC. Neither is it anticipated by Aura
and its outside counsel that the Staff will seek any monetary penalties
from Aura, Mr. Kurtzman or the former officer.

The events giving rise to the Staff's intent to recommend an enforcement
action concern the reporting of two subjects in reports previously filed
with the SEC in Fiscal 1993 and Fiscal 1994. Aura's outside counsel has
been meeting with the Staff in an effort to resolve this matter. However,
there can be no assurance that such a resolution will be achieved.

The first subject, for which the Staff has indicated it intends to allege
violations of the reporting and the books and records provisions of the
securities laws, relates only to the business that Aura engaged in with
Micro Computer Distribution Power ("MCDP"). The Staff claims that, in
addition to disclosing that MCDP was a significant customer of Aura's, Aura
should have disclosed more details about the nature of the transactions. As
disclosed in later filings, these transactions, which generated little or
no profit, were part of Aura's long range strategy to develop relationships
with manufacturers, suppliers and distributors for a series of computer
related applications that Aura has since introduced into the market. The
transaction had no material impact on Aura's reported loss.

The second subject, for which the Staff has indicated it intends to allege
violations of the reporting, the books and records and the anti-fraud
provisions of the securities laws, related to Aura's original reporting in
its form 10-Q for the nine months ending November 30, 1993, on its business
arrangement with John Jory Corporation ("Jory"). In 1994, Aura's form 10-Q
for November 30, 1993, was amended with respect to the Jory transaction.
Most of the revenue and expenses originally reported from the Jory
transaction were excluded from Aura's financial statements for the year
ended February 28, 1994. This adjustment had no material impact on Aura's
reported losses.

F-20
<PAGE>

Other Litigation
----------------

The Company is also engaged in other legal actions arising in the ordinary
course of business. In the opinion of management based in part upon the
advice of counsel, the ultimate resolution of these matters will not have a
material adverse effect. Therefore, no provision for these matters has been
made in the Company's consolidated financial statements.

(19) Concentrations of Credit Risk
-----------------------------

The Company maintains cash balances at several financial institutions
located in California and Minnesota. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. At
February 29, 1996, the Company's uninsured cash balances total $21,862,756.

The Company has trade receivables in the amount of $15,664,383 from three
customers. Subsequent to year end the Company has collected approximately
$6.8 million on these receivables.

(20) Compensating Balances
---------------------

At February 29, 1996, the Company has a certificate of deposit in the
amount of $1,877,613 included in cash, that is pledged as collateral for
outstanding letters of credit totaling $1,508,700 which have not yet been
drawn upon. The Company has a line of credit available in the amount of
$5,000,000 but not to exceed the balance in the certificate of deposit. The
balance at February 29, 1996 is $0.

(21) Recently Issued Accounting Pronouncements
-----------------------------------------

In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which becomes effective in Fiscal 1997.
Management believes that the adoption of SFAS No. 121 will not have a
material impact on the Company's financial position or results of
operations.

In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation". The Company does not
intend to change its accounting for stock-based compensation, but it will
make the additional disclosures in Fiscal 1997 as required by SFAS No. 123.

(22) Fourth Quarter Adjustments
--------------------------

Certain fourth quarter adjustments were made in Fiscal 1996 that are
significant to the quarter and to comparisons between quarters. Presented
below are the approximate amount of adjustments which are the result of
fourth quarter events and their effects recorded in the fourth quarter.
<TABLE>
<CAPTION>

Millions
--------
<S> <C>

Advertising $ 7.0
Trade Shows 1.5
Bad Debts 4.1
Returns and allowances 1.2
Inventory Valuation 2.1
Asset Valuation 1.9
Research & Development 3.3
----
Total $21.1
</TABLE>

F-21
<PAGE>

(23) Subsequent Event
----------------

MYS Corporation
---------------

On February 20, 1996 the Company entered into a Memorandum of Understanding
("MOU") with the principal shareholders of MYS Corporation of Japan setting
forth the Company's intent to purchase and the shareholder's intent to sell
100% of the outstanding shares of MYS, in exchange for shares of Aura
common stock in an amount and number to be determined. The MOU established
a framework in which the Company could conduct its due diligence and
negotiate a definitive sale and purchase agreement.

Subsequent to fiscal year end, the Company concluded its due diligence and
executed a definitive Stock and Investment Purchase Agreement with all the
MYS shareholders. The principal terms of the Stock and Investment Purchase
Agreement require the Company to issue common stock in such number of
shares as would equal Two Million Dollars in exchange for all outstanding
shares of MYS and its subsidiaries. In addition, the Company would assume
existing long term liabilities not to exceed Four Million Dollars and all
assets of MYS and its subsidiaries.

In addition to its corporate offices in Japan, MYS has manufacturing
operations in Malaysia and the U.S.A. MYS provides speakers to an OEM
customer base which includes Radio Shack as its most significant customer.
No provision has been made for the acquisition of MYS in the Company's
financial statements for the fiscal year end February 29, 1996. The Company
will consolidate MYS into its financial statements beginning the first
quarter of fiscal year 1997.

F-22

<PAGE>

EXHIBIT 10.36

STOCK AND INVESTMENT PURCHASE AGREEMENT

BY AND AMONG

YOSHIKAZU MASAYOSHI,
SADAO MASAYOSHI,
SACHIE MASAYOSHI,
KAZUAKI MASAYOSHI

AND

AURA SYSTEMS, INC.
<PAGE>

STOCK AND INVESTMENT PURCHASE AGREEMENT

THIS STOCK AND INVESTMENT PURCHASE AGREEMENT ("Agreement") is made and entered
into effective as of March 1, 1996 (the "Effective Date"), by and among AURA
SYSTEMS, INC., a Delaware corporation, on the one hand ("Buyer"), and MYS
CORPORATION, a Japanese company ("MYS"), YOSHIKAZU MASAYOSHI, an individual,
SADAO MASAYOSHI, an individual, SACHIE MASAYOSHI, an individual, and KAZUAKI
MASAYOSHI, an individual (the Masayoshi parties are, collectively, the
"Masayoshi Family")(MYS and the Masayoshi Family are, collectively, "Sellers"),
on the other hand.

RECITALS
--------

WHEREAS, Buyer is in the business of research, design, development,
manufacture and sale of electromagnetic products, including voice coil motors
and drivers, loud speakers and systems incorporating loud speakers;

WHEREAS, MYS is engaged in the research, design, development, manufacture
and sale of voice coil drivers and motors, loud speakers and systems
incorporating loud speakers;

WHEREAS, the Masayoshi Family collectively owns one hundred percent (100%)
of the issued and outstanding shares of voting common stock of MYS (the "MYS
Shares");

WHEREAS, MYS and the Masayoshi Family own equity interests in the
Subsidiaries and Affiliates of MYS (the "MYS Affiliate Interests");

WHEREAS, MYS and the Masayoshi Family own equity interests in certain
Subcontractors of MYS (the "MYS Subcontractor Interests"); and

WHEREAS, upon the terms and conditions, hereinafter set forth, Buyer wishes
to purchase from Sellers, and Sellers wish to sell to Buyer, the MYS Shares, the
MYS Affiliate Interests and the MYS Subcontractor Interests (the "Purchase").

NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained in this Agreement, the parties hereby
agree as follows:
<PAGE>

ARTICLE 1
DEFINITIONS

As used in this Agreement, the following terms shall have the following

1.1 AAA is defined in Section 11.8 below.
---

1.2 Affiliate means a person or entity that directly, or indirectly,
---------
through one or more intermediaries, controls or is controlled by, or is under
common control with, the person or entity specified. For purposes of this
Section 1.2, "control" shall be defined as (a) at least fifty percent (50%)
common equity ownership, or (b) the ability to direct the management or policies
of a company, whether by contract or otherwise.

1.3 Agreement is defined in the Preamble to this Agreement.
---------

1.4 Aura Common Stock means the common stock, $0.005 par value, of Aura
-----------------
Systems, Inc., a Delaware corporation.

1.5 Aura Share Certificates is defined in Section 6.2(f) below.
-----------------------

1.6 Buyer is defined in the Preamble to this Agreement.
-----

1.7 Closing means the consummation of the Purchase pursuant to Article 7
-------
below.

1.8 Closing Date is defined in Section 7.1 below.
------------

1.9 Company Records means each MYS Entity's organizational or charter
---------------
documents and all amendments thereto, stock ledgers, all minutes of the
proceedings of its Board of Directors or similar governing body, any committee
of the Board of Directors and shareholders proceedings, corporate seals, and all
other documents relating to its organization and corporate maintenance.

1.10 Contracts is defined in Section 3.2(k) below.
---------

1.11 Effective Date is defined in the Preamble to this Agreement.
--------------

1.12 Employment Agreements is defined in Section 6.1 (i) below.
---------------------

1.13 February 29, 1996 Balance Sheet means the balance sheet of MYS as of
-------------------------------
February 29, 1996.
<PAGE>

1.14 Financial Statements is defined in Section 3.2(g) below.
--------------------

1.15 Hazardous Materials Law means any national, prefectural or municipal
-----------------------
law, order, rule or regulation relating to pollution, worker safety, public
safety, human health, natural resources, the environment, or relating to the
discharge, remediation, removal, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Substances.

1.16 Hazardous Substance means any substance, material, chemical or waste,
-------------------
the presence of which requires investigation or remediation under, or which is
or becomes regulated by, any national, prefectural or municipal governmental
authority, due to its properties of being toxic, hazardous, explosive,
corrosive, flammable, infectious, radioactive, carcinogenic or mutagenic.

1.17 Indemnified Person means, with respect to any Loss, the party seeking
------------------
indemnification hereunder.

1.18 Indemnifying Person means, with respect to any Loss, the party from
-------------------
whom indemnification is being sought hereunder.

1.19 Licenses is defined in Section 3.2(j) below.
--------

1.20 Loss means any and all claims, demands, damages, liabilities, losses,
----
costs, interest, penalties and expenses (including attorneys' fees).

1.21 Market Value is defined in Section 2.2(a) below.
------------

1.22 Masayoshi Family is defined in the Preamble to this Agreement.
----------------

1.23 Most Recent Financial Statements is defined in Section 3.2(g).
--------------------------------

1.24 Most Recent Fiscal Year End is defined in Section 3.2(g).
---------------------------

1.25 MYS is defined in the Preamble to this Agreement.
---

1.26 MYS Affiliates shall mean the Subsidiaries and Affiliates of MYS.
--------------

1.27 MYS Affiliate Interests is defined in the fourth Recital to this
-----------------------
Agreement.

1.28 MYS Entities shall mean MYS, the MYS Affiliates and all
------------
Subcontractors of MYS in which Sellers individually or collectively hold equity
interests.
<PAGE>

Agreement.

1.29 MYS Interests is defined in Section 2.1 below.
-------------

1.30 MYS Instruments is defined in Section 6.1 (h) below.
---------------

1.31 MYS Shares is defined in the Third Recital to this Agreement.
----------

1.32 MYS Subcontractor Interests is defined in the fifth Recital to this

1.33 Premises means any real property and all improvements thereon which
--------
are owned, operated or leased by any of the MYS Entities.

1.34 Purchase is defined in the sixth Recital to this Agreement.
--------

1.35 Purchase Price is defined in Section 2.2 below.
--------------

1.36 Rules is defined in Section 11.8 below.
-----

1.37 Securities Act is the U.S. Securities Act of 1933, as amended.
--------------

1.38 Sellers is defined in the Preamble to this Agreement.
-------

1.39 Subcontractor means an entity or person who has entered into a
-------------
contract, express or implied, for the performance of an act with the person who
has already contracted for its performance.

1.40 Subsidiary means one corporation in which a parent corporation owns
----------
at least a majority of the equity stock and has control, directly or indirectly,
by reason of such majority ownership.

1.41 Taxes means all national, prefectural, state, local, municipal,
-----
foreign and other tax liabilities of any and all kinds arising out of Sellers'
ownership or operation of any of the MYS Entities and any obligation of any of
the MYS Entities with respect to any and all taxes including, without
limitation, income, profits, premiums, excise, sales, use, gross receipts,
franchise, transfer, withholding, employment, unemployment compensation,
payroll-related and property taxes, import duties and other governmental
charges, whether or not measured in whole or in part by net income, and
including deficiencies, interest, additions to tax or interest and penalties
with respect thereto, and including expenses associated with contesting any
proposed adjustment relating to the foregoing.
<PAGE>

1.42 "Tax Return" means any return, declaration, report, claim for refund,
----------
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.

ARTICLE 2
PURCHASE AND SALE OF SHARES AND INVESTMENTS

2.1 Purchase and Sale of Shares and Investment. Upon the terms and subject
------------------------------------------
to the conditions set forth in this Agreement, Buyer agrees to purchase from
each of Sellers, and each of Sellers agrees to sell, assign, transfer and convey
to Buyer at the Closing, all right, title and interest in and to (a) the MYS
Shares, (b) the MYS Affiliate Interests, and (c) the MYS Subcontractor Interests
(the MYS Shares, MYS Affiliate Interests and MYS Subcontractor Interests are,
collectively, the "MYS Interests"), in consideration of Buyer's payment of the
Purchase Price to Sellers in accordance with this Article 2.

2.2 Consideration. The aggregate purchase price for the MYS Interests
-------------
shall be Two Million United States Dollars (U.S.$2,000,000) (the "Purchase
Price"), payable in shares of Aura Common Stock. Buyer understands that the
liabilities of MYS at the time of the Closing will not exceed Four Million
United States Dollars (U.S.$4,000,000), which liabilities will continue to be
obligations of MYS following Purchaser's acquisition of the MYS Shares. The
Purchase Price shall be payable at Closing as follows:

(a) Buyer shall deliver to Sellers such number of shares of Aura Common
Stock whose aggregate Market Value shall be equal to Two Million United States
Dollars (U.S.$2,000,000.00). "Market Value" shall be determined based on the
closing selling price per share of Aura Common Stock on the Closing Date as
reported by the National Association of Securities Dealers through the NASDAQ
National Market System.

2.3 Fractional Shares: Allocation of Purchase Price. Buyer shall render a
-----------------------------------------------
cash payment in lieu of any fractional share. The Purchase Price shall be
allocated among Sellers in proportion to their respective holdings of MYS
Interests as set forth in Schedule 2.3 attached hereto.
------------

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLERS

As a material inducement to Buyer to enter into this Agreement and to
consummate the Purchase, Sellers, after due inquiry and investigation, jointly
and severally make the representations and warranties set forth in this Article
3.
<PAGE>

3.1 Representations and Warranties of Sellers
-----------------------------------------

(a) Enforceability; Approvals. This Agreement is the legal, valid and
-------------------------
binding obligation of each of Sellers, enforceable in accordance with its terms,
subject to judicial discretion regarding specific performance or other equitable
remedies, and except as may be limited by bankruptcy, reorganization,
insolvency, moratorium or other laws relating to or affecting the enforcement of
creditors' rights and remedies generally. No further approvals or consents by,
or filing with, any national, prefectural, municipal, foreign or other court or
governmental or administrative body, agency or any other third party is required
in connection with the execution and delivery by each of Sellers of this
Agreement, or the consummation by each of Sellers of the transactions
contemplated hereby.

(b) Ownership of MYS Interests. Each of Sellers is the owner,
--------------------------
beneficially and of record, of such MYS Interests as listed on Schedule 3.1 ~b)
----------------
and has good, valid and marketable title to such MYS Interests free and clear of
any liens, encumbrances, security interests, restrictions or claims whatsoever,
with full power and authority to deliver title to such MYS Interests to Buyer in
accordance with the terms of this Agreement. None of Sellers is a party to any
voting trust agreement or any other contract, agreement, arrangement,
commitment, plan or understanding restricting or otherwise relating to voting or
dividend rights or privileges with respect to the MYS Interests, or which
restrict the sale, transfer or assignment of the MYS Interests. Upon Buyer's
delivery of payment for the Purchase, each of Sellers, and all of Sellers,
collectively, will convey to Buyer good, valid and marketable title to the MYS
Interests free and clear of all liens, encumbrances, security interests,
restrictions or claims whatsoever (other than restrictions on transfer imposed
by the applicable securities laws).

(c) Full Transfer. Subsequent to consummation of the Purchase and other
-------------
transactions contemplated hereby, none of Sellers or their agents or
representatives shall have any ownership or investment interest whatsoever in
any of the MYS Entities, except for the indirect interest they will have through
their ownership of Aura Common Stock.

(d) Investment. Each Seller (i) understands that the shares of Aura
----------
Common Stock have not been, and will not be, registered under the Securities
Act, or under any state securities laws, and are being offered and sold in
reliance upon federal and state exemptions for transactions not involving any
public offering, (ii) is acquiring the Aura Common Stock solely for his or its
own account for investment purposes, and not with a view to the distribution
thereof, (iii) is a sophisticated investor with knowledge and experience in
business and financial matters, (iv) has received certain information concerning
Buyer and has had the opportunity to obtain additional information as desired in
order to evaluate the merits and the risks inherent in holding the Aura Common
Stock.

(e) Transactions with Affiliates. Except as set forth on Schedule 3.1
----------------------------- -------- ---
(e) attached hereto, none of Sellers has any interest, directly or indirectly,
- ---
in any lease, lien, contract, license, encumbrance,
<PAGE>

loan or other agreement to which any of the MYS Entities is a party, any
interest in any properties or assets of any of the MYS Entities, or any interest
in any competitor, supplier or customer of any of the MYS Entities. Except as
set forth on Schedule 3.1 (e) attached hereto, none of the MYS Entities is
----------------
indebted, directly or indirectly, to any of Sellers and none of Sellers is
indebted, directly or indirectly, to any of the MYS Entities.

(f) Brokers and Finders. None of Sellers is a party to any agreement
-------------------
with any person which would obligate either of Buyer or any of the MYS Entities
to pay any commission, brokerage or finder's fee in connection with the
transactions contemplated by this Agreement.

3.2 Representations and Warranties Concerning the MYS Entities.
----------------------------------------------------------

(a) Organization of the MYS Entities. Each of the MYS Entities is a
---------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation. Schedule 3.2(a) attached hereto sets
---------------
forth those jurisdictions in which each of the MYS Entities is qualified to do
business as a foreign corporation. Each of the MYS Entities is qualified to do
business as a foreign corporation and is in good standing in each state or
jurisdiction where the nature of its business or its ownership of property
requires it to be so qualified. Each of the MYS Entities has all necessary
corporate power and authority, including all necessary licenses and permits, to
carry on its business as it is now being conducted, and to own or lease and
operate its properties and assets. Complete, current and correct copies of the
Company Records of each of the MYS Entities have been delivered to Buyer prior
to the date hereof, and no changes have been made thereto since the date of
delivery.

(b) No Other Subsidiaries or Affiliates. Except as listed on Schedule
----------------------------------- --------
3.2(b) attached hereto, MYS does not own or control, directly or indirectly, any
- ------
interest or investment in any corporation, partnership, joint venture, business
organization, trust or other entity.

(c) Capital Structure of MYS. The authorized capital stock of MYS
-------------------------
consists of 560 shares of voting common stock, Y50,000 par value per share, of
which 280 shares are issued and outstanding. All of the MYS Shares are equal in
their rights, preferences and privileges, were duly and validly issued and are
fully paid and non-assessable. There are no outstanding options, warrants,
convertible debt or securities, calls, agreements, arrangements, commitments,
understandings or other rights with respect to either the MYS Shares, the
authorized and unissued shares of capital stock of MYS, or the sale, transfer or
issuance thereof.

(d) Capital Structure of MYS Affiliates. The authorized capital stock of
-----------------------------------
each MYS Affiliate consists of such number of authorized voting common stock and
such number of shares issued and outstanding as listed on Schedule 3.2(d)
---------------
attached hereto. As to each of the MYS Affiliates, all of their shares of common
stock are equal in their respective rights, preferences and privileges, were
duly and validly issued and are fully paid and non-assessable. There are no
outstanding options, warrants,
<PAGE>

convertible debt or securities, calls, agreements, arrangements, commitments,
understandings or other rights with respect to either the MYS Affiliate
Interests, the authorized and unissued shares of capital stock of any of the MYS
Affiliates, or the sale, transfer or issuance thereof.

(e) MYS Subcontractor Interests. Schedule 3.2(e) attached hereto sets
--------------------------- ---------------
forth all the investments by Sellers in Subcontractors of MYS. There are no
agreements, arrangements, commitments, understandings or other rights with
respect to either any of the MYS Subcontractor Interests or the sale or transfer
thereof.

(f) No Violations. Neither the execution and delivery of this Agreement,
-------------
nor the consummation of the transactions contemplated hereby will (a) violate
any provision of the organizational or charter documents of any of the MYS
Entities, (b) violate, or be in conflict with, or constitute a default (or any
event which, with the giving of notice or lapse of time or both, would
constitute a default) under, or give rise to any right of termination,
cancellation or acceleration under, any of the terms, conditions or provisions
of any agreement, instrument or other document to which any of Sellers or any of
the MYS Entities or any of their respective properties or assets may be bound,
or (c) violate any order, writ, injunction, decree, law, statute, rule or
regulation of any court or governmental authority applicable to any of Sellers
or any of the MYS Entities or any of their respective properties or assets.

(g) Financial Statements. Attached hereto as Exhibit A are the following
--------------------- ---------
financial statements (collectively the "Financial Statements"): (i) audited
--------------------
consolidated and unaudited consolidating balance sheets and statements of
income, changes in stockholders' equity, and cash flow as of and for the fiscal
year ended October 31, 1995 (the "Most Recent Fiscal Year End") for MYS and the
MYS Affiliates and (ii) unaudited consolidated and consolidating balance sheets
and statements of income, changes in stockholders' equity, and cash flow as of
and for the four (4) months ended February 29, 1996 for MYS and the MYS
Affiliates (the "Most Recent Financial Statements"). The Financial Statements
--------------------------------
(including the notes thereto) have been prepared in accordance with Japanese
GAAP applied on a consistent basis throughout the periods covered thereby,
present fairly the financial condition of MYS and the MYS Affiliates as of such
dates and the results of operations of MYS and the MYS Affiliates for such
periods, are correct and complete, and are consistent with the books and records
of MYS and the MYS Affiliates (which books and records are correct and
complete), provided, however, that the Most Recent Financial Statements are
subject to normal year-end adjustments (which will not be material individually
or in the aggregate).

(h) Absence of Certain Changes. Since the Most Recent Fiscal Year End,
--------------------------
there has not been:

(i) Any declaration or payment of dividends by any of the MYS Entities
or any transfer of properties or assets of any kind whatsoever by any of the MYS
Entities to any of Sellers with respect to any of the MYS Interests;
<PAGE>

(ii) Any transaction of any of the MYS Entities not in the ordinary
course of business;

(iii) Any material adverse change in the results of operations,
financial condition, business or prospects of any of the MYS Entities;

(iv) Any damage, destruction or loss, whether or not covered by
insurance, which has had or may have a material adverse effect on any of the
properties, assets, business or prospects of any of the MYS Entities;

(v) Any mortgage, pledge or subjection to lien, charge or encumbrance of
any kind on any of the properties or assets of any of the MYS Entities, or any
occurrence of, assumption of, or taking any properties or assets subject to, any
material liability not in the ordinary course of business and consistent with
past practices;

(vi) Any increase in, or commitment to increase, the compensation
payable or to become payable to any officer, director or employee of any of the
MYS Entities, or to any of Sellers, or any commitment to make severance, bonus
or special payments to any of such parties, upon a change in ownership or
management of any of the MYS Entities or upon termination of such parties;

(vii) Any adoption by any of the MYS Entities of a plan or agreement or
amendment to any plan or agreement providing any new or additional employee
benefits; or

(viii) To the best knowledge of Sellers, the occurrence of any other
event or the development of any other condition which has had or is reasonably
likely to have a material adverse effect on the results of operations, financial
condition, business or prospects of any of the MYS Entities.

(i) No Undisclosed Liabilities. None of MYS or the MYS Affiliates has
---------------------------
any liability or obligations of any nature (absolute, accrued, contingent or
otherwise) and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
any of them giving rise to any liability, except for (i) liabilities set forth
on the face of the balance sheet contained in the Most Recent Financial
Statements (rather than in any notes thereto) and (ii) liabilities which have
arisen after the Most Recent Fiscal Month End in the ordinary course of business
(none of which results from, arises out of, relates to, is in the nature of, or
was caused by any breach of contract, breach of warranty, tort, infringement, or
violation of law).

(j) Licenses and Permits. Schedule 3.2(j) attached hereto contains a
--------------------- ---------------
complete, current and correct list of all licenses, permits, franchises, rights
and privileges required for the business of all the MYS Entities ("Licenses").
The MYS Entities possess all Licenses necessary for the present conduct of their
businesses. Each of the Licenses is in full force and effect, and there are no
pending or threatened
<PAGE>

claims or proceedings challenging the validity of or seeking to revoke or
discontinue, any of the Licenses. None of the transactions contemplated by this
Agreement shall affect the validity of or cause the revocation or
discontinuation of any of the Licenses. Prior to the date hereof, Sellers shall
have caused the MYS Entities to deliver to Buyer a complete, current and correct
copy of each of the Licenses.

(k) Compliance with Contracts. Schedule 3.2(k) attached hereto contains
-------------------------- ---------------
a complete, current and correct list of all contracts, commitments, obligations
or agreements of all the MYS Entities, whether written or oral, formal or
informal, including any and all amendments or modifications thereto, the
performance of which will extend over a period of more than one year, result in
a material loss to any of the MYS Entities or involve consideration in excess of
U.S.$100,000.00 (the "Contracts"). No event has occurred which would constitute
a default (or any event which, with the giving of notice or lapse of time or
both, would constitute a default) under any term or provision of any of the
Contracts. Each of the Contracts is in full force and effect and is the legal,
valid and binding obligation of the parties thereto enforceable in accordance
with its terms.

(I) Compliance with Laws. The business of all of the MYS Entities has
--------------------
been conducted in compliance with all applicable laws, statutes, ordinances,
rules, regulations, orders and other requirements of all governmental
authorities having jurisdiction over the MYS Entities, except for violations
that individually, or in the aggregate, will have no material adverse effect on
the business, operations or financial condition of any of the MYS Entities.
Neither the MYS Entities nor Sellers have received any notification of any
asserted present or past failure by any of the MYS Entities to comply with such
laws, statutes, ordinances, rules, regulations, orders or other requirements.

(m) Litigation. Except as set forth in Schedule 3.2(m) attached hereto:
---------- ---------------

(i) There is no pending or, to the best knowledge of Sellers, threatened
action, suit, arbitration proceeding, investigation or inquiry before any court
or governmental or administrative body or agency, or any private arbitration
tribunal, against, relating to or affecting any of Sellers or any director,
officer, agent or employee of any of the MYS Entities in his or her capacity as
such, or the assets, properties or business of any of the MYS Entities, or the
transactions contemplated by this Agreement, nor is any of the MYS Entities
aware of any facts or circumstances which could reasonably lead to or provide
the basis for any such threatened action, suit, arbitration proceeding,
investigation or inquiry;

(ii) There is not in effect any order, judgment or decree of any court
or governmental or administrative body or agency enjoining, barring, suspending,
prohibiting or otherwise limiting any of Sellers or any of the MYS Entities or
any officer, director, employee or agent of any of the MYS Entities from
conducting or engaging in any aspect of the business of any of the MYS Entities,
or requiring such Seller or MYS Entity or any officer, director, employee or
agent of such MYS Entity to take certain action with respect to any aspect of
the business of such MYS Entity which could reasonably be anticipated to have a
material adverse effect on the business, operations or financial condition of
such MYS Entity; and
<PAGE>

(iii) None of the MYS Entities is in violation of or in default under
any order, judgment, writ, injunction or decree of any court or governmental or
administrative body or agency.

attached hereto:

(n) Environmental Compliance. Except as disclosed in Schedule 3.2(n)
------------------------ ----------------

(i) Neither Sellers nor any of the MYS Entities are aware of any past or
present events, settlements, consent decrees, conditions, circumstances,
activities, practices, incidents, actions or plans which may adversely impact,
interfere with or prevent any of the MYS Entities' continued compliance with,
Hazardous Materials Laws.

(ii) Neither Sellers nor any of the MYS Entities have discovered or
caused, and to the best of knowledge of Sellers and the MYS Entities, no other
person has discovered or caused, any discharge, emission, disposal or release of
Hazardous Substances on the Premises, or any occurrence or condition on the
Premises or in the vicinity of the Premises, which could make the Premises
subject to restrictions on the ownership, occupancy, transferability or use
under any Hazardous Materials Laws;

(iii) Neither Sellers nor any of the MYS Entities have manufactured,
stored or disposed of Hazardous Substances at any location which was not in
compliance with Hazardous Materials Laws;

(iv) No underground storage tanks or surface impoundments are now, or to
the best of knowledge of Sellers and the MYS Entities, ever have been, located
on the Premises; and

(v) No lien in favor of any governmental authority for liability under
or resulting from Hazardous Materials Laws, or damages arising from, or costs
incurred by such governmental authority in response to, a release of Hazardous
Substances, has ever been filed against the Premises.

(o) Patents. Trademarks, Trade Names, Etc.
--------------------------------------

(I) Schedule 3.2(o) describes:
---------------

(A) all patents held by the MYS Entities and all reissues, divisions,
continuations, continuations in part and extensions thereof and all pending
patent applications by the MYS Entities, including, for each such patent, the
serial or patent number, country, filing and expiration date and title;

(B) all registered trademarks and service marks of the MYS Entities
and pending applications by the MYS Entities to register trademarks and service
marks, including, for each such
<PAGE>

trademark and service mark, the registration or application number, country,
filing and expiration date, mark and class and all unregistered trademarks and
service marks used by the MYS Entities;

(C) all registered copyrights of the MYS Entities and applications by
the MYS Entities for registration of copyrights, including the registration
number, country and filing and expiration date of each such copyright; and the
conduct of its business.

(D) all proprietary software utilized by the MYS Entities in

Schedule 3.2(o) identifies all material licenses and other contracts or
---------------
commitments to which any of the MYS Entities is a party (either as licensor or
licensee) or otherwise subject relating to patents, trademarks, service marks,
trade names or copyrights (or applications or registrations as applicable for
any thereof), trade secrets or other proprietary know-how or technical
assistance, and, to the best knowledge of Sellers, no claims have been asserted
by any person to the use of any such patents, trademarks, service marks, trade
names, copyrights, technology, knowhow or processes or challenging or
questioning the validity or effectiveness of any such license or agreement. Each
item identified on Schedule 3.2(o) is valid and in full force and effect. With
---------------
respect to each such item, there are no existing defaults by any of the MYS
Entities thereunder and, to the best knowledge of Sellers, no event has occurred
which (with the giving of notice, passage of time, or both) would constitute a
default thereunder by any party. Except to the extent set forth in licenses
referred to on Schedule 3.2(o), each of the MYS Entities has good and valid
---------------
title to, or otherwise possesses adequate and, to the best knowledge of Sellers,
exclusive rights to use, all patents, trademarks, service marks, trade names,
copyrights, inventions, trade secrets, proprietary software and other
proprietary information necessary to permit the MYS Entities to conduct their
business and develop their products.

(ii) Except as set forth on Schedule 3.2(o), none of the MYS Entities
----------------
has, nor, to the best knowledge of Sellers, been alleged to have, infringed upon
any patent, trademark, service mark, trade name or copyright or misappropriated
or misused any invention, trade secret, proprietary software or other
proprietary information entitled to legal protection. None of the MYS Entities
has never asserted any claim of infringement, misappropriation or misuse.

(p) Tax Matters.
------------

(i) Each of the MYS Entities has filed all Tax Returns that it was
required to file. All such Tax Returns were correct and complete in all
respects. All Taxes owed by any of the MYS Entities (whether or not shown on any
Tax Return) have been paid. None of the MYS Entities currently is the
beneficiary of any extension of time within which to file any Tax Return. No
claim has ever been made by an authority in a jurisdiction where any of the MYS
Entities does not file Tax Returns that it is or may be subject to taxation by
that jurisdiction. There are no security interests on any of the assets of any
of the MYS Entities that arose in connection with any failure (or alleged
failure) to pay any Tax.
<PAGE>

(ii) Each of the MYS Entities has withheld and paid all Taxes required
to have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other third party.

(iii) No Seller or director or officer (or employee responsible for
Tax matters) of any of the MYS Entities expects any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of any of the MYS Entities
either (A) claimed or raised by any authority in writing or (B) as to which any
of Sellers and the directors and officers (and employees responsible for Tax
matters) of the MYS Entities has knowledge based upon personal contact with any
agent of such authority.

(iv) None of the MYS Entities has waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.

(q) Accuracy of Representations and Warranties. No representation or
------------------------------------------
warranty made in this Agreement by or on behalf of any of Sellers to Buyer, with
respect to any of the MYS Entities, any of Sellers, the MYS Shares, MYS
Affiliate Interests or the MYS Subcontractor Interests and the transactions
contemplated hereby, contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements so made, in
light of the circumstances under which they are made, not misleading.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER

As a material inducement to Sellers to enter into this Agreement and to
Sellers to sell the MYS Interests, Buyer, after due inquiry and investigation,
makes the representations and warranties set forth in this Article 4.

4.1 Organization of Buyer. Buyer is a corporation duly organized, validly
---------------------
existing and in good standing under the laws of the State of Delaware.

4.2 Authorization and Approvals. This Agreement is the legal, valid and
---------------------------
binding obligation of Buyer, enforceable in accordance with its terms, subject
to judicial discretion regarding specific performance or other equitable
remedies, and except as may be limited by bankruptcy, reorganization,
insolvency, moratorium or other laws relating to or affecting the enforcement of
creditors' rights and remedies generally. This Agreement has been duly and
validly authorized by all necessary corporate action of Buyer, and no further
approvals or consents by, or filing with, any federal, state, local, foreign or
other court or governmental or administrative body or agency is required in
connection with the execution
<PAGE>

and delivery by Buyer of this Agreement, or the consummation by Buyer of the
transactions contemplated hereby.

4.3 No Violations. Neither the execution and delivery of this Agreement,
-------------
nor the consummation of the transactions contemplated hereby, will (a) violate
any provision of the Certificate of Incorporation or the Bylaws of Buyer, (b)
violate, or be in conflict with, or constitute a default (or any event which,
with the giving of notice or lapse of time or both, would constitute a default)
under any material agreement or instrument to which Buyer is a party or by which
Buyer is bound, or (c) violate any order, writ, injunction, decree, law,
statute, rule or regulation of any court or governmental authority applicable to
Buyer.

4.4 Brokers and Finders. Buyer is not a party to any agreement with any
--------------------
person which would obligate Sellers or any of the MYS Entities to pay any
commissions, brokerage or finder's fee in connection with the transactions
contemplated by this Agreement.

4.5 Accuracy of Representations and Warranties. No representation or
------------------------------------------
warranty made in this Agreement by or on behalf of Buyer to Sellers, with
respect to Buyer and the transactions contemplated hereby, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements so made, in light of the circumstances under which
they are made, not misleading.

ARTICLE 5
COVENANTS

5.1 Confidentiality. None of the Sellers shall, without the prior written
----------------
consent of Buyer, disclose or acquiesce in the disclosure by any person or
entity, or use or enable use to the competitive detriment of Buyer, any non-
public information regarding any of the MYS Entities, their business, financial
condition, products, product development plans, business plans or research and
development activities.

5.2 Best Efforts. Each of Sellers shall use his, her or its best efforts
-------------
to cause the transactions contemplated hereby to be consummated on the Closing
Date, and to take or to cause the MYS Entities to take any and all actions which
may be required to be taken by Sellers or any of the MYS Entities under this
Agreement prior to the Closing Date. Sellers shall proceed as soon as
practicable in the procurement of all permits, consents and approvals and in the
taking of any other action, and the satisfaction of all other requirements
prescribed by law or otherwise necessary for consummation of the transactions
contemplated hereby on the terms herein provided, and shall diligently prosecute
the same.

5.3 Exclusivity. None of Sellers will (and Sellers will not cause or
-----------
permit any of the MYS Entities to) (i) solicit, initiate, or encourage the
submission of any proposal or offer from any person relating to the acquisition
of any capital stock or other voting securities, or any substantial portion of
the
<PAGE>

assets of, any of the MYS Entities (including any acquisition structured as a
merger, consolidation, or share exchange) or (ii) participate in any discussions
or negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
person to do or seek any of the foregoing. None of Sellers will vote their MYS
Interests in favor of any such acquisition structured as a merger,
consolidation, or share exchange. Sellers will notify Buyer immediately if any
person makes any proposal, offer, inquiry, or contact with respect to any of the
foregoing.

5.4 Covenant Not to Compete. During the term of their employment with
-----------------------
Buyer, none of the Masayoshi Family members will engage directly or indirectly
in any business that any of Buyer or the MYS Entities conducts as of the Closing
Date in any geographic area in which any of Buyer or the MYS Entities conducts
that business as of the Closing Date; provided, however, that no owner of less
-----------------
than 1% of the outstanding stock of any publicly traded corporation shall be
deemed to engage solely by reason of such stock ownership in any business
conducted by such publicly traded corporation. If the final judgment of a court
of competent jurisdiction declares that any term or provision of this Section
5.4 is invalid or unenforceable, the parties agree that the court making the
determination of invalidity or unenforceability shall have the power to reduce
the scope, duration, or area of the term or provision, to delete specific words
or phrases, or to replace any invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified after the expiration of the
time within which the judgment may be appealed.

5.5 Restrictions on Transfer. Each Seller covenants and agrees not to
------------------------
sell, transfer, pledge, assign, hypothecate or otherwise convey any interest in
any of the Aura Common Stock, except in compliance with the Federal securities
laws of the U.S. and any other applicable securities laws. Sellers acknowledge
that each share certificate evidencing Aura Common Stock will be imprinted with
a legend substantially in the following form:

"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE
COMPANY, STATING THAT THE SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT."

Each holder desiring to transfer a share of Aura Common Stock first must furnish
Buyer with a written opinion reasonably satisfactory to Buyer in form and
substance from counsel reasonably satisfactory to
<PAGE>

Buyer by reason of experience to the effect that the holder may transfer shares
of Aura Common Stock as desired without registration under the Securities Act.

5.6 Tax Matters. The following provisions shall govern the allocation of
-----------
responsibility as between Buyer and Sellers for certain tax matters following
the Closing Date:

(a) Tax Periods Ending on or Before the Closing Date. Buyer shall
------------------------------------------------
prepare or cause to be prepared and file or cause to be filed all Tax Returns
for MYS and the MYS Affiliates for all periods ending on or prior to the Closing
Date which are filed after the Closing Date. Buyer shall permit MYS and the MYS
Affiliates to review and comment on each such Tax Return described in the
preceding sentence prior to filing. Sellers shall reimburse Buyer for Taxes of,
MYS and the MYS Affiliates with respect to such periods within fifteen (15) days
after payment by Buyer or MYS or the MYS Affiliates of such Taxes to the extent
such Taxes are not reflected in the reserve for Tax liability (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) shown on the face of the February 29, 1996 Balance Sheet.

(b) Tax Periods Beginning Before and Ending After the Closing Date.
--------------------------------------------------------------
Buyer shall prepare or cause to be prepared and file or cause to be filed any
Tax Returns of MYS and the MYS Affiliates for Tax periods which begin before the
Closing Date and end after the Closing Date. Sellers shall pay to Buyer within
fifteen (15) days after the date on which Taxes are paid with respect to such
periods an amount equal to the portion of such Taxes which relates to the
portion of such Taxable period ending on the Closing Date to the extent such
Taxes are not reflected in the reserve for Tax liability (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) shown on the face of the February 29, 1996 Balance Sheet.
For purposes of this Section, in the case of any Taxes that are imposed on a
periodic basis and are payable for a Taxable period that includes (but does not
end on) the Closing Date, the portion of such Tax which relates to the portion
of such Taxable period ending on the Closing Date shall, be deemed to be the
amount of such Tax for the entire Taxable period multiplied by a fraction the
numerator of which is the number of days in the Taxable period ending on the
Closing Date and the denominator of which is the number of days in the entire
Taxable period. Any credits relating to a Taxable period that begins before and
ends after the Closing Date shall be taken into account as though the relevant
Taxable period ended on the Closing Date. All determinations necessary to give
effect to the foregoing allocations shall be made in a manner consistent with
prior practice of MYS and the MYS Affiliates.

(i) Buyer, the MYS Entities and Sellers shall cooperate fully, as and
to the extent reasonably requested by the other party, in connection with the
filing of Tax Returns pursuant to this Section and any audit, litigation or
other proceeding with respect to Taxes. Such cooperation shall include
<PAGE>

the retention and (upon the other party's request) the provision of records and
information which are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. The MYS Entities and Sellers agree (A) to retain all books and
records with respect to Tax matters pertinent to the MYS Entities relating to
any taxable period beginning before the Closing Date until the expiration of the
statute of limitations (and, to the extent notified by Buyer or Sellers, any
extensions thereof) of the respective taxable periods, and to abide by all
record retention agreements entered into with any taxing authority, and (B) to
give the other party reasonable written notice prior to transferring, destroying
or discarding any such books and records and, if the other party so requests,
the MYS Entities or Sellers, as the case may be, shall allow the other party to
take possession of such books and records.

(ii) Buyer and Sellers further agree, upon request, to use their best
efforts to obtain any certificate or other document from any governmental
authority or any other Person as may be necessary to mitigate, reduce or
eliminate any Tax that could be imposed (including, but not limited to, with
respect to the transactions contemplated hereby).

(e) Tax Sharing Agreements. All tax sharing agreements or similar
----------------------
agreements with respect to or involving the MYS Entities shall be terminated as
of the Closing Date and, after the Closing Date, the MYS Entities shall not be
bound thereby or have any liability thereunder.

5.7 Retention of MYS Employees. Buyer covenants and agrees to continue the
--------------------------
employment the employees of the MYS Entities listed on Schedule 5.7 hereto (the
------------
"Subject Employees") following the Closing Date. Notwithstanding the foregoing,
Buyer shall have the right to terminate any Subject Employee for cause or if
there is a material adverse change in the business, financial condition or
prospects of MYS. Buyer is not assuming any obligations of Sellers relating to
any employee benefit plans of MYS. The Subject Employees will participate under
the employee benefit plans, programs and policies established by Buyer.

5.8 Registration of Aura Common Stock. Purchaser shall use its best
---------------------------------
efforts to register the shares of Aura Common Stock to be delivered to the
Sellers as consideration pursuant to this Agreement, by including such shares in
a registration statement or an amendment to a registration statement to be filed
by Purchaser with the Securities and Exchange Commission pursuant to Section 5
of the Securities Act of 1933; provided that, Purchaser may, in its sole
discretion, elect to delay the filing of any such registration statement or the
filing of any post-effective amendment or prospectus supplement thereto if, in
Purchaser's sole judgment, such delay is necessary in order for Purchaser to
comply with any applicable law or in order to prevent adverse consequences to
Purchaser and its shareholders. Purchaser's covenant in this Section 5.8 is
subject to Purchaser and Seller entering into such agreements and
indemnification arrangements as are customary for "piggy-back" registration
rights.
<PAGE>

ARTICLE 6
CONDITIONS TO CLOSING

6.1 Conditions Precedent to Buyer's Performance. The obligation of Buyer
-------------------------------------------
to consummate the Purchase in accordance with this Agreement is subject to the
fulfillment of each of the following conditions, any of which may be waived in
writing by Buyer, in whole or in part, in its sole discretion:

(a) Compliance with this Agreement.
------------------------------

(i) Each of Sellers shall have performed and satisfied all covenants,
obligations, agreements and conditions required by this Agreement to be
performed and satisfied by each of them, on or prior to the Closing Date;

(ii) The representations and warranties of Sellers contained in
Article 3 above shall be true, correct and complete as of the Closing Date;

(iii) Sellers shall have delivered to Buyer a certificate dated as of
the Closing Date, signed by each of Sellers and dated as of the Closing Date,
certifying as to the truth and correctness of each of the representations and
warranties of Sellers set forth in Article 3 above and the fulfillment of the
covenants of Sellers set forth in Article 5 above which are required by this
Agreement to be performed and satisfied on or prior to the Closing Date.

(b) No Material Adverse Change. As of the Closing Date, there shall have
--------------------------
been no material adverse change in the business, financial conditional results
of operations or prospects of any of the MYS Affiliates since the Most Recent
Financial Statements. Sellers shall cause each of the MYS Affiliates to deliver
to Buyer a certificate dated as of the Closing Date, signed by each of Sellers
and by an authorized executive officer of such MYS Affiliates, certifying that
there has been no such material adverse change other than as provided or allowed
herein.

(c) No Default. As of the Closing Date, no MYS Entity shall be in
----------
default under, and no event shall have occurred which would constitute a default
(or any event which, with the giving of notice or lapse of time or both, would
constitute a default) under, any contract or other material agreement to which
the MYS Entity is a party, which default or defaults individually or in the
aggregate have or could have a material adverse effect upon the business,
financial condition, results or prospects of operations of the MYS Entity.

(d) No Illegality. It shall not have become illegal, on or prior to the
-------------
Closing Date, under any statute, rule, order or regulation of Japan or any
prefectural or municipal governmental entity thereof or under any statute, rule,
order or regulation of the United States or any state or local governmental
entity
<PAGE>

thereof, for Buyer to perform the transactions contemplated by this Agreement,
provided that such illegality shall not have arisen by reason of any wrongful
act or omission to act by Buyer.

(e) Governmental Consents and Approvals. Buyer shall have received any
-----------------------------------
and all necessary approvals and consents from all governmental agencies to
complete the transactions contemplated hereby, and such approvals and consents
shall not have expired or been withdrawn as of the Closing Date.

(f) Absence of Legal Challenge to Acquisition. As of the Closing Date,
-----------------------------------------
there shall be in effect no litigation, action, investigation, inquiry,
proceeding, order, writ, injunction, judgment or decree relating to or affecting
any of Sellers in any court, governmental agency or regulatory authority in
Japan or any prefecture or territory thereof or in the United States or any
state or territory thereof, prohibiting the consummation of the Purchase or any
of the other transactions specified in or required by the terms of this
Agreement, and there shall be no material good faith action, suit or proceeding
pending before any court, governmental agency or other body challenging the
legality of the Purchase or any of the transactions specified in or required by
the terms of this Agreement, or seeking to restrain their consummation, which,
in the reasonable opinion of legal counsel for Buyer, would make it necessary
not to consummate such transactions.

(g) Approval of Documentation. The form and substance of all
--------------------------
certificates, instruments and other documents delivered to Buyer by Sellers and
the MYS Entities under this Agreement, including without limitation, any changes
made to the documents attached hereto as Schedules, shall be satisfactory in all
respects to Buyer and its legal counsel.

(h) MYS Interests. Each of Sellers shall have delivered to Buyer the
--------------
certificates or other documents representing, in the aggregate, all of the MYS
Interests to be purchased and sold hereunder, registered in the name of each of
Sellers and duly and validly endorsed by each of Sellers for transfer to Buyer
free and clear of any encumbrance or restriction whatsoever (other than
restrictions on resale arising under applicable securities laws)(the "MYS
Instruments").

(i) Employment Agreements. At the Closing, each of the Masayoshi
---------------------
Family members shall execute and deliver employment agreements with Buyer in the
form of Exhibit B attached hereto ("Employment Agreements").
---------

(j) Corporate Proceedings. The Shareholders and Board of Directors of
---------------------
MYS shall have taken all necessary actions to authorize in accordance with the
requirements of Japanese law, the transactions contemplated herein.

6.2 Conditions Precedent to Sellers' Performance. The obligation of
---------------------------------------------
Sellers to consummate the sale of the MYS Interests in accordance with this
Agreement is subject to the fulfillment of each of the
<PAGE>

following conditions, any of which may be waived in writing by Sellers, in whole
or in part, in their sole discretion:

(a) Compliance with this Agreement.
-------------------------------

(i) Buyer shall have performed and satisfied all covenants,
obligations, agreements and conditions required by this Agreement to be
performed and satisfied by it, on or prior to the Closing Date;

(ii) The representations and warranties of Buyer contained in Article
4 above shall be true, correct and complete as of the Closing Date; and

(iii) Buyer shall have delivered to Sellers a certificate signed by
the President of Buyer and dated as of the Closing Date, certifying as to the
truth and correctness of each of the representations and warranties of Buyer set
forth in Article 4 above.

(b) No Illegality. It shall not have become illegal, on or prior to the
--------------
Closing Date, under any statute, rule, order or regulation of Japan or any
prefectural or municipal governmental entity thereof or under any statute, rule,
order or regulation of the United States or any state or local governmental
entity thereof, for Seller to perform the transactions contemplated by this
Agreement, provided that such illegality shall not have arisen by reason of any
wrongful act or omission to act by Seller.

(c) Governmental Consents and Approvals. Seller shall have received any
-----------------------------------
and all necessary approvals and consents from all governmental agencies to
complete the transactions contemplated hereby, and such approvals and consents
shall not have expired or been withdrawn as of the Closing Date.

(d) Absence of Legal Challenge to Acquisition. As of the Closing Date,
-----------------------------------------
there shall be in effect no litigation, action, investigation, inquiry,
proceeding, order, writ, injunction, judgment or decree relating to or affecting
Buyer in any court, governmental agency or regulatory authority in Japan or any
prefecture or territory thereof or the United States or any state or territory
thereof, prohibiting the consummation of the Purchase or any of the other
transactions specified in or required by the terms of this Agreement, and there
shall be no material good faith action, suit or proceeding pending before any
court, governmental agency or other body challenging the legality of the
Purchase or any of the transactions specified in or required by the terms of
this Agreement, or seeking to restrain their consummation, which, in the
reasonable opinion of legal counsel for Sellers, would make it necessary not to
consummate such transactions.

(e) Approval of Documentation. The form and substance of all
--------------------------
certificates, instruments and other documents delivered to Sellers by Buyer
under this Agreement, including, without limitation, any changes made to the
documents attached hereto as Schedules, shall be satisfactory in all respects to
Sellers and to their legal counsel.
<PAGE>

(f) Aura Share Certificates. Buyer shall have issued and delivered to
------------------------
Sellers stock certificates representing the Aura Common Stock (the "Aura Share
Certificates"). The Aura Stock Certificates shall be free and clear of any
encumbrance or restriction whatsoever (other than restrictions on resale arising
under applicable securities laws).

(g) Employment Agreements. At the Closing, Buyer shall execute and
---------------------
deliver the Employment Agreements with each of the members of the Masayoshi
Family.

ARTICLE 7
THE CLOSING

7.1 The Closing. The purchase and sale of the MYS Instruments shall be
------------
consummated at the Closing which shall take place on Tuesday, on May 14, 1996
(the "Closing Date"), or as may be extended by mutual written agreement of the
parties, following fulfillment or waiver, in accordance with this Agreement, of
all conditions to the Closing. The Closing shall occur at 5:00 p.m., at the
offices of Buyer located at 2335 Alaska Avenue, El Segundo, California 90245.

7.2 Obligations of Sellers. At the Closing, Sellers shall deliver to
-----------------------
Buyer:

(a) The MYS Instruments required by Section 6.1(h) above;

(b) The certificates required by Section 6.1(a)(iii) and 6.1(b) above;

(d) The duly executed Employment Agreements required by Section 6.1 (i)
above;

(e) Possession of the Premises and all of the books and records of MYS;

(f) Minutes of the Board of Directors of MYS ratifying prior loans,
rectifying transfer of the shares by Yamamotos and approving of the sale of
shares to the Purchaser; and

(g) Minutes of a meeting of the shareholders of MYS occurring after
March 31, 1996.

7.3 Obligations of Buyer. At the Closing, and against delivery of each of
the items required to be delivered by Sellers and the MYS Entities under Section
7.2 above, Buyer shall deliver to Sellers;
<PAGE>

(a) The Purchase Price required under Section 2.2 above, including the
Aura Share Certificates required by Section 6.2(f) above.

7.4 Further Assurances. Each of the parties hereto agrees that, at any
time and from time to time after the Closing Date, it will take any and all
actions and execute and deliver to any other party such further instruments or
documents as may reasonably be required to give effect to the transactions
contemplated under this Agreement.

ARTICLE 8
TERMINATION PRIOR TO
THE CLOSING

8.1 Events Permitting Termination. This Agreement and the transactions
-----------------------------
contemplated hereby may be terminated at any time prior to the Closing Date upon
the occurrence of any of the following:

(a) By the mutual consent in writing of Buyer and all Sellers;

(b) By either Buyer or one or more, of Sellers, upon ten (10) days'
prior written notice to the other parties to this Agreement, in the event of a
material default in the due and timely performance by such other party of any of
its warranties, covenants, agreements or obligations under this Agreement;
provided, however, that the defaulting party shall have a period of time in
which to cure such default, which period shall expire on the earlier to occur of
(i) the day which is ten (10) days after the date on which such written notice
is given, or (ii) the Closing Date; or

(c) By either Buyer or one or more of Sellers, by written notice to the
other parties to this Agreement, if any of the conditions to the Closing set
forth in Article 7 above shall not have been satisfied as of the Closing Date,
and such condition is not duly waived in accordance with the provisions hereof;
provided that, no party shall be entitled to terminate this Agreement on such
basis if the condition to Closing has not been satisfied as a result of such
party's conduct or failure to act in accordance with such party's obligations
under this Agreement.

8.2 Procedure Upon Termination. In the event of termination of this
--------------------------
Agreement pursuant to Section 8.1 above, the party electing to terminate or
abandon this Agreement shall give notice of such election to terminate or
abandon this Agreement to the other parties hereto in the manner specified in
Section 11.2 below, and the transactions contemplated hereby shall be terminated
or abandoned without further action by any party. If the transactions are
terminated or abandoned as provided above:
<PAGE>

(a) Each party will redeliver all documents, work papers and other
material of any other party relating to the transactions contemplated hereby,
whether so obtained before or after the execution hereof, to the party
furnishing the same;

(b) All confidential information received by Sellers hereto with respect
to the business of Buyer shall be treated in accordance with Section 5.1 above;
and

(c) No party hereto shall have any liability or further obligation to
any other party to this Agreement except as stated in this Section 8.2.

ARTICLE 9
INDEMNIFICATION

9.1 Indemnification by Sellers.
---------------------------

(a) Sellers shall, jointly and severally, defend, indemnify and hold
Buyer and its Affiliates and their respective officers, directors, shareholders,
employees and agents, harmless from and against any and all claims, demands,
damages, liabilities, losses, costs, interest, penalties and expenses (including
attorneys' fees) of any kind or nature whatsoever which may be asserted against,
or sustained or incurred by the Indemnified Parties or any of them, as a result
of a breach of any representation, warranty or covenant contained in this
Agreement, or in any documents delivered pursuant hereto, including, without
limitation, any exhibit, schedule, certificate, and financial statements.

(b) Subsequent to the Closing Date, Sellers shall jointly and severally
defend, indemnify and hold Buyer and its Affiliates and their respective
officers, directors, employees and agents, harmless from and against any and all
claims, demands, damages, liabilities, losses, costs, interest, penalties and
expenses (including attorneys' fees) of any kind or nature whatsoever which may
be asserted against or sustained or incurred by Buyer, any of the MYS Entities
or their respective officers, directors, employees and agents, arising out of or
in connection with (i) any liabilities arising from the business or transactions
carried out by the MYS Entities prior to the Effective Date, unless such
liabilities are reflected on the February 29, 1996 Balance Sheet. The liability
of Seller under this Section 9.1 shall survive until the third anniversary of
the Closing Date.

9.2 Indemnification by Buyer. Buyer agrees to defend, indemnify and hold
-------------------------
Sellers harmless from and against any and all claims, demands, damages,
liabilities, losses, costs and expenses (including attorneys' fees) of any kind
or nature whatsoever which may be asserted against Sellers or sustained or
suffered by Sellers based upon or related to a breach of any representation or
warranty contained in Article 4. The liability of Buyer under this Section 9.2
shall survive until the third anniversary of the Closing Date.
<PAGE>

9.3 Defense of Claims. If any suit or action is brought against any of the
-----------------
Indemnified Person(s) for which the Indemnifying Person(s) have the obligation
to indemnify under this Article 9, the Indemnified Person(s) and the
Indemnifying Person(s) shall attempt in good faith to select mutually acceptable
counsel to defend, conduct the defense of, and prosecute, settle, compromise or
otherwise dispose of any such suit or action. Any settlement, compromise or
other disposition of such action or suit which results in a material liability
or otherwise has a material financial effect on the MYS Entities shall be
mutually agreed upon between the Indemnified Person(s) and the Indemnifying
Person(s) in good faith. If the Indemnified Person(s) and the Indemnifying
Person(s), after good faith discussions, fail to reach a mutually acceptable
choice of counsel or fail to agree mutually on the terms of any settlement,
compromise or other disposition of an action or suit hereunder, then the
Indemnified Person(s) shall have the right to choose such counsel or determine
the terms of such settlement, compromise or other disposition.

ARTICLE 10
SURVIVAL OF REPRESENTATIONS AND WARRANTIES

The respective representations and warranties of the parties contained
herein or in any certificates or the documents delivered prior to or at the
Closing shall not be deemed waived or otherwise affected by any investigation
made by any party hereto, and shall survive until the third anniversary of the
Closing Date, except that the representations and warranties contained in
Section 3.1 (b) shall survive in perpetuity.

ARTICLE 11
MISCELLANEOUS

11.1 Expenses. Buyer, on behalf of itself, and each of Sellers, on behalf
--------
of themselves and the MYS Entities, shall each bear their own expenses in
connection with the Purchase and the other transactions contemplated by this
Agreement, including the fees of attorneys, accountants, advisors, brokers,
investment bankers and other representatives.

11.2 Notices and Legal Process. Except as otherwise provided in this
-------------------------
Agreement, all notices and other communications and legal process shall be in
writing and shall be personally delivered, transmitted by facsimile, or
transmitted by postage prepaid, registered or certified mail with return receipt
requested, as elected by the party giving such notice, addressed as follows:

(a) If to Buyer:
<PAGE>

Aura Systems, Inc.
2335 Alaska Avenue
El Segundo, CA 90245
Attn: Anthony T. Cascio, Esq., General Counsel
Facsimile: (310) 643-8719

With a copy to:

Graham & James LLP
801 South Figueroa Street
14th Floor
Los Angeles, California 90017
Attn: Hillel T. Cohn, Esq.
Facsimile: (213) 623-4581

(b) If to Sellers:

Yoshikazu Masayoshi
No. 501 Chuo-Tanimachi Building
9-3-7 Tanimachi Chuo-ku
Osaka, Japan
Facsimile: 011-81 6-765-9837

With a copy to:

_________________________________

Facsimile:_______________________

Notices shall be deemed to have been given: (i) on the fifth (5th) business
day after posting, if mailed first class, (ii) on the date of receipt, if
delivered personally, or (iii) on the next business day after transmission, if
by facsimile (and appropriate confirmations have been received). Any party
hereto may change his or her or its address or facsimile number specified above
by giving written notice to the other parties hereto in the same manner as
specified in this Section 11.2.

11.3 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, and all of which together
shall constitute but one and the same instrument.
<PAGE>

11.4 Waiver and Amendment. Any party may by written instrument extend the
---------------------
time for the performance of any of the obligations or other acts of any other
party hereunder and may waive (a) any inaccuracies of any other party in the
representations or warranties contained in this Agreement or in any document
delivered pursuant hereto, (b) compliance with any of the covenants,
undertakings or agreements of any other party, or satisfaction of any of the
conditions to its or their obligations, contained in this Agreement, or (c) the
performance (including performance to the satisfaction of a party or its legal
counsel) by any other party of any of its obligations set out herein. Neither
this Agreement nor any provisions hereof may be amended, waived, modified or
discharged except by an agreement in writing signed by both parties hereto.

11.5 Entire Agreement. Unless otherwise specifically agreed in writing,
----------------
this Agreement and the Schedules attached hereto represent the entire
understanding of the parties with reference to the transactions set forth
herein, and supersede all prior representations, warranties, understandings and
agreements heretofore made by the parties.

11.6 Binding Agreement. This Agreement shall be binding upon and inure to
-----------------
the benefit of the parties hereto and their respective heirs, successors and
assigns. Neither any of the MYS Entities nor any of Sellers may transfer or
assign their respective rights or obligations under this Agreement without
obtaining the prior written consent of Buyer. Buyer may, at any time, transfer
or assign its rights or obligations under this Agreement to any of its
Affiliates without obtaining the prior consent of any of Sellers.

11.7 Governing Law and Attorneys' Fees. This Agreement shall be governed
----------------------------------
by, and construed in accordance with, the internal laws of the State of
California without giving effect to any choice or conflict of law provision or
rule (whether of the State of California or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
California. In the event of any action at law or suit in equity in relation to
this Agreement or any Schedule or other instrument or agreement required
hereunder, the prevailing party in such action or suit shall be entitled to
receive its attorneys' fees and all other costs and expenses of such action or
suit.

11.8 Arbitration. Any dispute, controversy or claim arising out of or
-----------
relating to this Agreement, or the breach, termination or invalidity thereof,
shall be settled by arbitration in accordance with the UNCITRAL Arbitration
Rules (the "Rules") as at present in force. The American Arbitration Association
(the "AAA") shall administer the arbitration and act as appointing authority
pursuant to the Rules. The arbitration panel shall be composed of three
arbitrators appointed pursuant to Article 7 of the Rules; the parties further
agree that the third arbitrator appointed by either (i) the two arbitrators
appointed by the parties or (ii) in the event that the two arbitrators appointed
by the parties cannot agree on a mutually acceptable individual, the AAA shall
have appropriate expertise in the subject matter of the arbitration. In the
event of any conflict between the Rules and this Section, the provisions of this
Section shall govern. The arbitration, including the rendering of the award,
shall take place in Los Angeles, California, U.S.A.
<PAGE>

The language to be used in the arbitration shall be English. Judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy.

11.9 Captions. The captions of the various Sections and subsections hereof
--------
and on the Schedules attached hereto are for convenience of reference only, and
shall not affect the meaning or construction of any provision hereof under or of
any such Schedules.

11.10 Parties in Interest. Nothing in this Agreement, whether express or
-------------------
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over or against any party to this Agreement.

11.11 Severability: Construction. In the event any provision hereof is
--------------------------
determined to be invalid or unenforceable, the remaining provisions hereof shall
be deemed severable therefrom and shall remain in full force and effect.

11.12 Plurality. Words and phrases defined in the plural shall also be used
---------
in the singular and vice versa and be construed in the plural or singular as
appropriate and apparent in the context used.

11.13 Confidentiality of Agreement. Each of Buyer and Sellers expressly
----------------------------
acknowledges and agrees that the existence and terms and conditions of this
Agreement and the Schedules and other documents delivered pursuant hereto are
confidential and proprietary. The parties, and each of them, further acknowledge
and agree that no party shall disclose the existence or terms and conditions of
this Agreement or any of the Schedules and other documents delivered pursuant
hereto, except (i) in accordance with the requirements of any applicable
securities or corporate laws or (ii) pursuant to a specific order or other
decree has been issued by a court of competent jurisdiction.

11.14 Representation by Counsel. Each party hereto represents and agrees
-------------------------
with each other that it has been represented by or had the opportunity to be
represented by, independent counsel of its own choosing, and that it has had the
full right and opportunity to consult with its respective attorney(s), that to
the extent, if any, that it desired, it availed itself of this right and
opportunity, that its authorized officers (as the case may be) have carefully
read and fully understand this Agreement in its entirety and have had it fully
explained to them by such party's respective counsel, that each is fully aware
of the contents thereof and its meaning, intent and legal effect, and that its
authorized officer (as the case may be) is competent to execute this Agreement
and has executed this Agreement free from coercion, duress or undue influence.

[SIGNATURE PAGE FOLLOWS]
<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
on the 30th day of April 1996.

"BUYER"

AURA SYSTEMS, INC.

By:
----------------------------------------
Name:
-------------------------------------
Title:
------------------------------------

"SELLERS"

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YOSHIKAZU MASAYOSHI

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SADAO MASAYOSHI

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SACHIE MASAYOSHI

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KAZUAKI MASAYOSHI