AURA SYSTEMS INC, 10-K, 1998-06-15

AURA SYSTEMS INC
10-K, 1998-06-15
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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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 28, 1998

[_] 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

Name of each exchange
on which registered
-------------------
Nasdaq National Market

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. [_]

On June 12, 1998 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $180,103,925. The aggregate market value
has been computed by reference to the average bid and average asked price of the
stock on June 12, 1998. On such date the Registrant had 81,060,253 shares of
Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Pursuant to General Instruction G(3) to Form 10-K, the information required
by Part III (Items 10, 11, 12 and 13) is incorporated by reference from the
Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders
scheduled to be held on August 19, 1998.
<PAGE>

When used in this report on Form 10-K (this "Report"), the word "expects,"
"anticipates," "estimates," and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements include, but are
not limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements as a result of certain
factors, including those discussed in this Report. The Company expressly
disclaims any obligations or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based. This
Report includes product names, trade names and marks of companies other than the
Company. All such company or product names are trademarks, registered
trademarks, trade names or marks of their respective owners and are not the
property of the Company.

PART I

ITEM 1 BUSINESS

INTRODUCTION

Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, is
engaged in the development, commercialization and sales of products, systems and
components using its patented and proprietary electromagnetic and electro-
optical technology, as well as the sale of other products which do not utilize
this technology, such as CD-ROMs, sound cards, multimedia kits, modems, 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.

Prior to Fiscal 1992, the Company was engaged in work on various
classified military programs which allowed the Company to develop its
electromagnetic and electro-optical technologies and applications.
Subsequently, the Company transitioned from a supplier of defense technology to
a manufacturer and supplier of consumer and industrial related products and
services.

In 1994, the Company founded its subsidiary NewCom, Inc. ("NewCom"), which
is engaged in the manufacture, packaging, selling and distribution of computer
related communications and sound related products, including modems, CD-ROMs,
sound cards, speaker systems and multimedia products, thereby expanding its
presence in the growing multimedia, communication and sound-related consumer
electronics market. The Company acquired 100% of the outstanding shares of MYS
Corporation of Japan ("MYS") in 1996 to expand the range of its sound products
and speaker distribution network. MYS is engaged in the manufacture and sale of
speakers and speaker systems for home, entertainment and computers.

In September 1997, NewCom completed an initial public offering. On
September 16, 1997, NewCom stock started trading at $9.40 per share. In the
offering 2,000,000 newly issued shares were sold to the public by NewCom
together with 300,000 shares of the Company's holdings, resulting in Aura owning
approximately 72.1% of NewCom at the conclusion of the offering. On June 12,
1998, NewCom common stock was trading at $10.50, per share on Nasdaq. Aura
owned 68.83% of NewCom's outstanding common stock as of June 12, 1998.

In addition to the NewCom operations, the Company's other principal
operations are divided into three distinct operating divisions: (1) Automotive
and Industrial, which is manufacturing and commercializing products with
applications to both consumer and military, including the AuraGen (TM) and
EVA(TM); (2) Display Systems, which is commercializing Aura's actuated mirror
array technology ("AMA(TM)") in consumer and commercial display systems for use
in televisions, computer monitors and theaters; and (3) AuraSound, Inc.
("AuraSound"), which manufactures and sells professional and consumer sound
systems and components and products, including speakers, amplifiers, and Bass
Shakers(TM).

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DESCRIPTION OF BUSINESS

TECHNOLOGIES

Set forth below is a summary description of the Company's technology and
its applications.

A. MAGNETICS TECHNOLOGY

The Company has developed and patented highly efficient magnetic circuits,
which the Company believes provides substantial improvements over devices of
similar purpose which were available prior to Aura's technology. These designs
include electromagnetic actuators, such as the HFA(TM) and the EMA(TM) actuator
designs and the Ferrodisk Induction Motor applied in the Company's
electromagnetic power generator technology.

FERRODISK INDUCTION MOTOR (AURAGEN(TM))

In Fiscal 1993, the Company's research first discovered that certain
magnetic circuit equations could apply, with different parameters, to describe
linear actuators that could provide unusually high force levels in a device of
relatively small volume and weight. As this concept extended from a linear
actuator to a rotary actuator, a motor called the "Ferrodisk Motor" was
developed by the Company.

In the later half of 1995 and in early 1996, a device named the Ferrodisk
Alternator Starter (FAS(TM)) was designed, built, tested, installed on a Ford
Ranger truck, and displayed publicly at the Society of Automotive Engineers
(SAE) trade show. FAS used its large torque capacity to start the engine with
direct drive, that is, with no gearing. After starting, its function converted
to that of an alternator, which had a capacity for generating power several
times that of a conventional alternator. The Company called this electromagnetic
power generation feature the Auragen(TM). See "Business-Products and Product
Development-Automotive and Industrial Products."

The AuraGen contains aluminum bars and rings embedded in it. AC voltages,
similar to household currents, set up electric currents in the electromagnets,
creating a series of magnetic poles that whirl round and round the rings. When
the disk of steel is forced to spin faster than the motion of the magnetic
poles, there is an interaction between the magnetism in the disk and the coils
of the electromagnets. The electric currents in the wires are pushed so they
flow backwards against the voltages, and this effect builds up the electrical
energy content in the electronics at the expense of mechanical energy provided
by the rotor. The electronic box of the AuraGen provides the alternating
voltages to make the device work, stores the electrical energy generated, and
prepares the exact type of voltages as in household wiring. The device is
controlled by a computer that continuously measures the speed of the AuraGen
rotor and the power drawn by the user, so that alternating voltages of the best
phase and frequency are sent to the electromagnets.

MAGNETIC HIGH FIDELITY ACTUATORS (HFA(TM))

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.

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 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.

The Company believes that its high fidelity electromagnetic actuator HFA(TM), 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 whereas
Aura's HFA(TM)

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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 whereas the HFA's(TM) stroke is virtually unlimited. For
example, Aura's HFA(TM) is capable of producing more than 1,000 pounds of force
over a 32 inch stroke. The Company is commercially employing its HFA(TM)
technology in applications such as audio speakers, motion simulators and
actuated weld heads. See "Business-Products and Product Development-Name Brand
and OEM Sound Related Products/Automotive and Industrial Products."

ELECTROMAGNETIC ACTUATOR ("EMA(TM)")

During Fiscal 1995, the Company developed, built and demonstrated a new
type of actuator, called the Electromagnetic Actuator, or EMA(TM). The Company
developed EMA(TM) to fill the performance gap between linear actuators and
solenoids. To date, the principal application of the EMA(TM) has been in Aura's
Electromagnetic Valve Actuator System ("EVA(TM)"), a patented
electromagnetically powered system which opens and closes engine valves at any
user specified time. See "Business-Products and Product Development-Automotive
and Industrial Products."

Like a solenoid, EMA(TM) operates on purely electromagnetic principles, and
therefore uses no permanent magnets. The Company developed it initially for the
industrial and automotive markets, but believes it may also be incorporated into
the test equipment market as well. An EMA(TM) is physically equivalent in size
to solenoids with comparable force capacities and can be operated at
temperatures exceeding 450 degrees Fahrenheit.

What sets EMA(TM) 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(TM) 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.

Another advantage of EMA(TM) over a solenoid is its actuator-like ability
which provides consistent force over much longer 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(TM)
basically "spreads" the solenoid's peak force over the entire stroke, providing
linear force over a greatly extended stroke length without the need for complex
electronics.

MAGNETIC MATERIALS

The Company is pursuing research into magnetic materials. 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.

The Company holds proprietary know-how and patents 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 also appears to offer
considerable potential for cost savings during material production. This
process allows for greater variation in the initial composition of material thus
providing higher yield.

b. DISPLAY SYSTEM TECHNOLOGY

LIGHT EFFICIENT DISPLAYS - ACTUATED MIRROR ARRAY ("AMA(TM)")

The Company has developed and patented a technology (a "light valve") for
generation of images called the Actuated Mirror Array ("AMA(TM)") technology.
The AMA(TM) technology 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 and
exhibition displays, and the testing of electro-optical devices for military or
civilian use.

Although there can be no assurances, the Company believes that the AMA(TM)
can be manufactured at a

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competitive cost in large quantities, thus making it commercially feasible.
Thus, AMA(TM) based devices are expected to offer the combination of increased
display intensity at a lower production cost.

Light displays, such as projectors and large screen televisions, can be
made by a number of techniques, many of which are currently available. 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 display market addressing large images, the principal 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 divided into 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. DMD's 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 with gas. The gas glows
allowing an image to be created by an array of such tiny tubes. Each of these
technologies has their own advantages and limitations, thus creating niches
within the display market where competitive advantages can be achieved.

The Company believes that the AMA(TM) technology has a technical advantage
over other technologies in achieving higher contrast, more intensity and longer
lived elements.

The Company has entered into a license and manufacturing agreement with
Daewoo Electronics Co., Ltd. to manufacture televisions and other devices based
on AMA(TM) technology. See "Business-Products and Product Development-Display
Systems."

PRODUCTS AND PRODUCT DEVELOPMENT

A. AUTOMOTIVE AND INDUSTRIAL PRODUCTS

AURAGEN(TM)

AuraGen(TM) is a unique electromagnetic generator that is mounted to the
automobile engine, which generates both 110 volt and 220 volt AC power when the
vehicle is running. AuraGen(TM) is the only load follower AC generator: the
power generated by AuraGen(TM) is directly proportional to the load on the
system. This allows for longer lifetime as well as more economical usage.
AuraGen(TM) turns a vehicle's idling engine into a generator capable of
producing thousands of watts of power. Potential markets include construction
fleets, recreation vehicles, military vehicles and emergency vehicles. The
AuraGen is being distributed and sold through dealers and distributors. The
Company started commercial production of AuraGen(TM) subsequent to the end of
Fiscal 1998. See "Business-Competition-AuraGen(TM)."

ELECTROMAGNETIC VALVE ACTUATOR ("EVA"(TM))

EVA(TM) is an electromagnetic actuator capable of opening and closing
internal combustion engine valves, replacing the mechanical camshaft on an
engine.

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. Computer control of the valve timing has
potentially material benefits to engine performance, fuel economy and emissions.
With EVA(TM), 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 entire camshaft assembly, which includes timing chain,

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camshaft, rockerarms, 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(TM) to
control the amount of air going into the engine. Overall engine cost may be
substantially reduced.

In recent years, the Company has entered into agreements with 15 companies
to retrofit EVA's on different types of diesel, automobile and motorcycle
engines for evaluation and testing. During Fiscal 1998 an EVA system was
delivered to a major domestic Original Equipment Manufacturers (OEM) which is
evaluating EVA for possible use in its automobile production. In Fiscal 1998,
the Company developed a new more reliable servo control system that provides
reduced power used and reduced noise over the entire RPM range. In addition, the
Company started work on an improved latching mechanism for EVA that will further
reduce noise in the system. See "Business-Competition-EVA(TM)."

SPARKING GASKET SYSTEM ("SGS(TM)")

The Sparking Gasket System (SGS(TM)) structure is made up of a gasket
material and electric circuit with integrated sparking electrodes. The Company
believes that SGS(TM) 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. Although the
Company has substantially completed the development of the SGS(TM), no
assurances can be given with respect to commencement of SGS production in Fiscal
1999. The Company intends to commercialize SGS following a complete
implementation of the manufacturing and distribution of the AuraGen.

Industrial Applications

The Company believes that the sphere of industrial 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 tested and sold 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
is commercializing its technology into speakers, simulators, actuated weld
heads, as well as other industrial applications.

B. DISPLAY SYSTEMS

In 1992, the Company entered into a joint development and licensing
agreement with Daewoo Electronics Co., Ltd. ("Daewoo") to develop and
commercialize televisions using Aura's AMA(TM) display technology. 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 is also 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(TM) will be identified
on the product by the Aura trademark. Royalty payments will be on a scheduled
basis upon commencement of commercial production by Daewoo.

Daewoo, which is solely responsible for manufacturing and sales under the
license agreement, has advised the Company that it may be able to begin
commercial production of large screen display televisions under the license
agreement in Fiscal 1999. There are no assurances as to when or if Daewoo will
commence commercial production of televisions incorporating Aura's AMA(TM)
display technology. The ultimate degree of success, if any, of this venture is
dependent on Daewoo. See "Business-Competition-AMA(TM)."

C. COMPUTER RELATED PRODUCTS

COMMUNICATIONS AND MULTIMEDIA PRODUCTS

Aura, through its majority-owned NewCom subsidiary, is engaged in the
manufacture, packaging and sale of high performance computer related
communications and multimedia products for the personal computer market,
principally through distributors and mass merchandisers. These products
include, among others, computer sound

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cards, which can be utilized with both AuraSound NRT(TM) and conventional
speakers, data fax modems, including 33.6 Kbps, 56 Kbps and ISDN, CD-ROM's,
amplifiers and other components. NewCom also manufactures and sells multimedia
kits to end users in order to add or upgrade multimedia capabilities to their
personal computer systems. These multimedia kits typically include CD-ROM's
bundled with sound cards and conventional 3" desktop speakers as well as
numerous CD titles licensed from unaffiliated third parties. Commencing in the
fourth quarter of Fiscal 1997 the Company has included its AuraSound NRT(TM)
desktop speakers in its high end, audiophile multimedia kits. CD-ROM's and other
conventional components contained in the multimedia kits are purchased from
unaffiliated third parties. See "Business-Competition-Computer Related
Products."

In addition, in late 1996 NewCom acquired a license for its internet
television solution product, WebPal(TM), which allows consumers with standard
television sets to access the Internet.

In late 1996, NewCom also acquired a distribution license from Alaris Inc.,
to market and distribute to dealers a new product that will allow users to send
both video and sound (VideoGram(TM)) through conventional E-mail. This system,
referred to as the "eCam Desktop Digital Video Camera and Video E-Mail Creator"
is composed of both hardware and software.

COMPUTER MONITORS

Since 1993, the Company has been distributing computer monitors
manufactured by unaffiliated third parties in order to develop relationships
with potential OEM customers for its speakers and other computer related
products. Due to the recent currency fluctuation in Asia and increase in
competition in monitor prices the Company has been reducing its monitor business
throughout Fiscal 1998 and this trend is expected to continue in Fiscal 1999.
See "Business-Competition-Computer Related Products."

D. NAME BRAND AND OEM SOUND RELATED PRODUCTS

Aura has developed audio speakers based upon Aura's patented
electromagnetic actuator and other proprietary magnetic and acoustical
techniques. 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 more efficient voice coil motor utilizing a new type of
magnetic structure--based upon Aura's patented line of high fidelity linear
actuators (HFA(TM))--to drive speaker cones. Utilizing the Company's "Neo-Radial
Technology" ("NRT(TM)"), Aura has developed speakers that it believes to be more
efficient, which require no magnetic shielding and provide longer stroke for
deeper bass as well as lower distortion due to its under-hung magnetic
configuration. Aura's speaker designs provide improved power capabilities as
well as lower distortion, using dual magnetic systems ("DMS(TM)") circuits and
magnetic circuits and drivers using combinations of Neo and ferrite magnets. See
"Business-Competition-Speakers and Sound Systems."

AURASOUND NRT(TM) SPEAKERS

AuraSound NRT(TM) audio speakers have been sold commercially since 1992,
and are currently being sold to both end users and computer and television OEM's
as well as the automobile aftermarket and the professional sound market. In
Fiscal 1998, the AuraSound division sold product lines with over 50 products
utilizing its proprietary technology: Aspect(TM) multi-media speakers (NRT(TM)),
designed for the computer multimedia market; the Mobile Reference(TM) Series
(NRT(TM)), which is targeted for the top-of-the-line car sound aftermarket; and
the Aura Force Series (DMS(TM)), which is a middle-of-the-line car aftermarket
sound system. Aspect(TM) Series speakers are sold through dealers and mass
merchandisers throughout the country, both as stand alone products and packaged
in multimedia kits. The auto aftermarket speakers are sold through dealers and
installers.

LINE SOURCE(TM)

In Fiscal 1998, the AuraSound division introduced a new line of home audio
speakers, utilizing a patented advanced Line Source(TM) driver technology. The
driver utilizes a deformable ribbon which forms a figure eight centered about an
integrated voice coil. The voice coil is driven at right angles to the magnet
which surrounds it. The ribbon becomes the sound generating surface creating an
acoustic dispersion much wider than a cone is able to produce.

PROFESSIONAL LOUDSPEAKERS

AuraSound NRT(TM) speakers are showcased by its wholly owned subsidiary,
Electrotec, Inc., which leases

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high end concert sound systems to the contemporary touring music industry. In
addition, the AuraSound(TM) professional NRT(TM) speakers are sold to high end
manufacturers and distributors.

MYS(TM) SPEAKERS

The AuraSound division expanded its range of sound products and
distribution channels in 1996 with the acquisition of MYS Corporation of Japan
("MYS"). MYS also manufactures, markets and sells other moderately priced,
conventional multimedia, bookshelf and home theater sound systems for private
labels and OEM users.

AMPLIFIERS

In order to expand its product line, the Company acquired Phillips Sound
Labs ("PSL"(TM)) in August 1996 to provide 12 volt power amplifiers to
complement the speaker systems sold by the Company. These current amplifiers are
sold through dealers and distributors under the PSL(TM) and the Aura Force
Series.

BASS SHAKERS(TM)

In Fiscal 1995, the Company commenced production of the Bass Shaker(TM), a
patented electromagnetic transducer which generates the bass effect of a large
sub-woofer in both car and home stereo systems without producing the loud sound
volume which typically accompanies bass range speakers. The Bass Shaker(TM) is
an electromagnetic transducer 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 Company believes that the driver and
passengers get the feel and sound of a very large subwoofer without producing
sound outside of the car. In 1996, the Company also introduced the Bass Shaker
Plus(TM), a complete system that includes the Bass Shakers(TM), a fader system,
an Aura digital amplifier and installation accessories. Currently, the Bass
Shaker(TM) and Bass Shaker Plus(TM) are sold through dealers across the U.S.
Both systems are sold internationally through distributors.

AVS THEATER SOUND SYSTEM

The Company has developed and is endeavoring to commercialize a theater
sound system ("AVS") which creates a new theater dimension utilizing the
Company's patented electromagnetic transducer. The AVS system entails the
activation of transducers installed onto movie theater seats which generates
sound through special effects sound channels.

PRINCIPAL SOURCES OF REVENUE

For the year ended February 28, 1998, multimedia products were the largest
single source of revenue, constituting approximately $52 million, or 32.3% of
gross revenues. Sound related products (exclusive of speakers in multimedia
kits) contributed approximately $31 million or 19.3% of revenues. Modems
contributed approximately $38 million of revenue, or 23.6% during Fiscal 1998.
In Fiscal 1997 multimedia products accounted for approximately $37.8 million of
revenues, or 28.3%. During Fiscal 1997 modems and speakers contributed
approximately $18 million and $9 million, or 13.5% and 6.7% of revenues,
respectively. For the fiscal year ended February 29, 1996 and sales of computer
monitors accounted for revenues of $24.1 million or 29.3%. No other products
accounted for more than 10% of revenues during the foregoing periods.

SIGNIFICANT CUSTOMERS

The Company sold sound related products and computer related products to
five significant customers during Fiscal 1998. Sales of speakers to a major
electronics retailer accounted for approximately $11.8 million or 7.3% of gross
revenues. Sales of communications and multimedia products to major mass
merchandisers Best Buy, Circuit City, and Staples accounted for approximately
$60.1 million or 37.3% of gross revenues. Sales of computer monitors to two
customers accounted for approximately $10 million or 6.2% of revenues.

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.

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The Company believes the principal competitive factors in the markets for
the Company's products include ability to develop and market technologically
advanced products to meet changing market conditions, price, reliability,
product support 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.

The Company's products and technologies compete in a variety of markets.
The following is a discussion of certain factors unique to certain of its
products.

AURAGEN(TM)

Portable generators meet a large market need for auxiliary power. Millions
of units per year are sold in North America alone, and millions more across the
world to meet market demands for 1 to 10 Kilowatts of portable power. The
market for these power levels basically addresses the Commercial, Leisure and
Residential markets, and divide essentially into: a) higher power, higher
quality and higher price commercial level units; and b) lower power, lower
quality and lower price level units.

There is significant competition in the auxiliary power market from: a)
Portable Generator Sets ("Gensets"); and b) Electrical Inverters ("Inverters").

Gensets provide the strongest competition across the widest marketplace for
auxiliary power: Onan, Honda and Kohler among others are well established and
respected brand names in the Genset market for higher reliability auxiliary
power generation. There are 44 registered Genset manufacturing companies in the
U.S.

The following table is a summary comparing the leading Genset products with
the AuraGen.(TM)

TABLE 1: GENERATORS

<TABLE>
<CAPTION>
ONAN HONDA HONDA KOHLER AURAGEN(TM)
PARAMETERS MARQUIS 5000 EG5000X EX5500 5CKM G5000
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rated Power 5,000 W 4,500 W 5,000 W 5,000 W 5,000 W

Weight 258 lbs/117.3 kg 146 lbs/66.4 kg 393 lbs/178.6 kg 268 lbs/122 kg 68 lbs/30.9 kg

Cubic Feet/
Cubic Meters 6.72/.19 5.39/.15 26.80/.76 3.71/0.11 0.25/0.01

Output 120 V 120/240 V 120/240 V 120/240 V 120/240 V

Engine RPM
@ Rated Output 1,800 3,600 3,600 1,800 1,400

Noise (DBA @ 73.5 82 65 88.5 64
10 Ft.)`

Load-Follower no no no no yes
Economy
</TABLE>

In addition to competition from Gensets, there are 6 major manufacturers of
Inverters in the U.S.; representative of the leaders are Vanner, Dimension and
Hearst.

Inverters provide strong competition in specific markets of the overall
market place for mobile power: The specific markets where inverters are strong
competitors are Ambulance, Fire and Rescue, Small Recreational

8
<PAGE>

Vehicles and Telecommunications.

LIMITATIONS OF INVERTERS:

.Inverters address a much more limited and specialized market than Gensets;
.The most significant portion of inverter sales are in the lower power
range: i.e., 2500 watts or lower.
.True quality Inverter power above 2500 watts requires a 24 volt automotive
electrical system (twice 12 volts); and the maximum output for quality
power in the commercial market is on the order of 4800 watts. (See Table
2).
.Quality power (pure sine wave and well regulated 60Hz) is a significant
cost factor in Inverters (Table 2).
.Often, or usually, Inverters require upgraded vehicle alternator and
battery harness, and--for extended use period without battery charging--an
additional battery pack.

TABLE 2: INVERTERS

HEART I/F VANNER VANNER VANNER AURAGEN(TM)
PARAMETERS FREEDOM 25 BRAVO 2600 TB30-12 A40-120X G5000
<S> <C> <C> <C> <C> <C>
1. Max Rated Power (Watts) 2500 2600 2800 4800 5000
2. Weight (LBS) 56 70 75 110 68
2A. Weight Battery Pack Add/No Add/No Add/No No No
3. Overall Cubic In. 1207.5 1866.73 1800 2595.94 432.73
4. 60 Hz Yes Yes Yes Yes Yes
5. Sine Wave @ All RPM Modified Modified Yes Modified Yes
6. Battery Discharge Operation Yes Yes Yes No No
7. Vehicle Engine Noise
(DBA @ 10Ft.) 64 64 64 64 64
8. Load Follower-Economy Yes Yes Yes Yes Yes
</TABLE>

Electromagnetic Valve Actuator (EVA(TM))

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 in the industry 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. However, it 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.

The Aura EVA(TM) approach uses electromagnetic technology. The 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.

ACTUATED MIRROR ARRAY (AMA(TM))

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?

9
<PAGE>

.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?

Other parameters such as display resolution are not significant
discrepancies, 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(TM). 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 DMD 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 of DMD 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. Texas Instrument's mirrors are 16
microns in size as compared to the 100 micron size for an Aura AMA(TM) 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(TM) can be summarized as follows:

<TABLE>
<CAPTION>
Comparison Item: TI's DMD Aura's AMA(TM)
- ---------------- -------- ----------
<S> <C> <C>
Image generation technique: Pulse Width Modulation Intensity Modulation
Light efficiency: Low - limited by micro-mirror size Very high - due to large mirror size
Maximum brightness: Large - limited due to heating of Very large - no practical limit known
the electronics
Complexity: High - 10 transistors per pixel Low - only 1 transistor per pixel
required
</TABLE>

COMPUTER RELATED PRODUCTS

The Company experienced a great deal of competition in the computer related
communications and multimedia products and computer monitor industry. In the
communications market NewCom's direct U.S. competitors include Zoom Telephonic,
Cardinal Technology, Boca Research, Best Data, Logicode, U.S. Robotics and
MicroCom. In the multimedia products market, NewCom's direct competitors
include Creative Laboratory Ltd., Aztec Systems Ltd., Diamond Technology, Inc.,
Hi-Val, and Pinnacle Micro.

Many of NewCom's current and potential competitors have a significantly
greater market presence, name recognition and financial and technical resources,
and may have long standing market positions and brand name recognition.
Further, semiconductor components are purchased by NewCom from a number of
vendors to obtain the most advanced components available. However, some of
NewCom's competitors have captive semiconductor suppliers, which can give them
greater control over design, availability and cost.

This industry has been marked by consolidations in recent periods as a
result of severe operating losses or discontinuance of business. This volatility
and intense competitive pressure in these markets could adversely affect this
industry.

The market for computer related communications and multimedia products and
computer monitors is characterized by rapidly changing technology, short product
life cycles and evolving industry standards. The Company's success in this
industry will depend upon its ability to continually enhance its existing
products and to introduce new products on a timely basis. Accordingly, the
Company intends to continue to make investments in product and technological
development.

10
<PAGE>

Speakers and Sound Systems

The Company believes that the speakers using the AuraSound NRT(TM)
technology's have significant advantages, as compared to conventional design
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.

In the speaker applications, the Company's NRT(TM) technology currently
provides products in four basic categories.

In the first category, the professional and high end of the market, the
Company believes its products to be competing for market share with JBL, EV,
Peavey, RCE, TAD and Rainbus-Heinz, among others. All of these competitors
provide a fine system based on traditional and conventional magnetic circuits.
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, Altec-
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. The system provided by the Company is naturally magnetically shielded
and weighs on the average 33% less than other equivalent systems. Here, the
Company competes with Tenegan Foster, Harmon and Panasonic, and 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 and Jensen. The Bass Shaker(TM) is
smaller, provides superior bass and does not generate large decibels of sounds.
It is a unique product in the market place.

MANUFACTURING

The AuraGen is assembled at Aura's facility in El Segundo with parts which
are produced under subcontract with various suppliers. The Company currently
manufactures its actuator products, ceramics and professional speakers at its
own facilities. The Company subcontracts the manufacture of its own brand name
and OEM speakers and amplifiers at facilities in the U.S., China, Malaysia, and
the Phillipines. The Company subcontracts the manufacture and assembly of other
products to several different suppliers on a purchase order basis.

Speakers are currently produced by the joint venture in Malaysia and at a
Malaysian facility operated by MYS, described below, on a purchase order basis.
The Bass Shaker(TM) is produced in Mexico.

NewCom currently uses four primary contract manufacturers, located in
China, Taiwan, Mexico and the U.S. NewCom performs component integration,
testing, installation of value added software and packaging at its Westlake
Village, California facility.

In Fiscal 1996, the Company acquired a 26,000 square foot manufacturing
facility, in El Segundo, California for the AuraGen(TM) product line. In Fiscal
1998, the Company set up the production facilities including production line in
the acquired building. During Fiscal 1997, the Company set up a small
fabrication facility for the AMA(TM) product in El Segundo, California. This
facility consists of a class 100 clean room and fabrication equipment for semi-
conductor processes.

11
<PAGE>

MALAYSIAN JOINT VENTURE

In 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(TM) SDN. BHD., was
established under Malaysian law to operate in Malaysia and 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 joint venture began shipping products in 1995. In Fiscal 1998, the
joint venture started manufacturing speakers for the MYS division. Due to the
MYS demand, the joint venture is expected to begin producing speaker drivers at
its capacity during Fiscal 1999.

DEWAN-AURA JOINT VENTURE

In 1995 the Company also entered into an agreement with K&K for the
formation of a joint venture to manufacture Aura's Bass Shaker(TM). In
connection with the agreement, Aura granted K&K an exclusive license to use
Aura's patented and proprietary technology. As consideration for the license to
K&K, the Company was entitled to receive license fee payments quarterly over the
life of the patent. Scheduled payments for the first five years totaled
approximately $2.9 million, of which $500,000 was received in Fiscal 1996.

Without any changes to its terms, the two joint ventures were merged in
Fiscal 1996 into one joint venture encompassing both. The new venture was
renamed Dewan-Aura. The Indian joint venture started production in late Fiscal
1996. During Fiscal 1998 the Company increased its "Brand Name" speaker
products and shifted manufacturing demand at the joint venture from lower and
OEM drivers to higher end products. The Indian joint venture quality was not
meeting the Company's quality standards. The quality problems were partly due
to the unavailability of high quality parts and components in India. Both the
Company and the joint venture spent considerable amount of time and effort
trying to solve problems. However, in late Fiscal 1998 (3rd quarter) the
parties agreed to terminate the license agreement and the Company moved
manufacturing to Malaysia, the Phillipines and Mexico where the Company had
already been manufacturing these products during Fiscal 1998. See Management's
Discussion and Analysis of Financial Conditions and Results of Operations-
Results of Operation ("MD&A").

AURA K&K LICENSE AGREEMENT

In February 1997, the Company entered into a license agreement with K&K
Enterprises in India to commercialize the AuraGen(TM) in the Indian, Nepal, Sri
Lanka and Bangladesh markets. (See also Dewan-Aura discussion of K&K
Enterprises in this "Manufacturing Section"). The agreement called for a
license fee of $3,500,000 to be paid in payments over a 24 month period starting
in June 1997, a fixed per unit royalty for every unit built and shipped in the
licensed territory after December 1998. Furthermore, all units were to
identified on the product by an Aura trademark (AuraGen). Due to the delays
associated with commencement of production of the AuraGen there was a delay in
the commencement of license payments. However, subsequent to the end of Fiscal
1998 the Company received the first license payment of $300,000. Royalty
payments per unit were to be on a scheduled basis every quarter after
December 1, 1998. The Company expected that payments of the remaining portion
of the license would be proportionally delayed due to the late start.

On May 11, 1998, India conducted a series of nuclear tests and on May 13,
1998 the President of the United States imposed a range of economic sanctions
upon India pursuant to the Arms Export Control Act. These sanctions and the
current climate generally has affected the Company's ability to request and
obtain necessary United States Department of State and Commerce Indian export
approvals and licenses. New and pending export licensing requests with respect
to dual-use products and transfers of high technology are currently either being
placed on hold or denied.

12
<PAGE>

AuraGen is a high technology product which has application in military
vehicles, where unique portable power generation may also power missile
launching devices as well as telecommunication/radar and other devices. No
assurances can be given that the government will now permit sales of AuraGens to
the Indian military, allow a technology transfer of this sort to an Indian
private company, or that, given the status of sanctions, K&K will honor its
payment obligations under the license agreement. Therefore, in view of these
uncertainties the license must be suspended temporarily. See "MD&A."

AURA-DETROIT CENTER TOOL LICENSE AGREEMENT

In 1994, the Company formed Auratech, Inc. as a joint venture to develop,
design, manufacture and market machine tooling robotics and industrial hand tool
applications of the Company's electromagnetics technology. In June 1995,
Auratech entered into a license agreement with Detroit Center Tool ("DCT"). DCT
is engaged in business relating to the design and integration of robotics in
automobile assembly lines. Under the license, DCT was entitled to manufacture
the Company's patented and proprietary electromagnetic actuator for an actuated
tool used in such assembly lines. In late 1995, the Company purchased 50.1% of
Auratech owned by its joint venture partner. In Fiscal 1998, due to business
shift in DCT, including spinning-off some of its operations, Auratech and DCT
terminated the license. The Company now owns 100% of Auratech and operates it
as a wholly-owned subsidiary. Auratech is currently pursuing machine tooling
robotics and industrial hand tool applications with a third party. See "MD&A."

PRODUCT DEVELOPMENT EXPENDITURES

During the fiscal years ended February 28, 1998, February 28, 1997, and
February 29, 1996 the Company spent approximately $1.4 million, $6.0 million,
and $5.2 million, respectively, on Company sponsored research and 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 for technology
which it considers important to the development of its business. The U.S.
Patent Office has to date issued 76 patents to Aura and has allowed 6 patent
applications that will issue as patents. A majority of these patents expire
between the years 2008 and 2015. Of the issued patents and allowed
applications, 29 pertain to its automotive/industrial applications, 28 pertain
to its sound applications, 21 pertain to its electro-optics applications, and 4
pertain to its communication technology. In addition, the company has 14 patent
applications pending, 4 of which pertain to its automotive/industrial
applications, 3 pertain to its sound applications, 3 pertain to its electro-
optics applications, 2 pertain to its communication technology, and 2 pertain to
miscellaneous applications. Additionally, 33 patent applications are in various
stages of preparation for filing. There are no assurances that any of the
patent application or any other 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 29, 1998, the Company employed 543 persons, 112 of which are
employed by the Company's majority-owned subsidiary NewCom. The Company
believes that its relationship with its employees is good. The Company is not a
party to any collective bargaining agreements.

FORWARD LOOKING STATEMENTS

This Form 10-K Report contains forward looking statements. 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 future results of operation, to differ materially from those expressed
in any forward-looking statements made by the Company.

Such factors include, but are not limited to, the following risks and
contingencies: Changed business

13
<PAGE>

conditions in the consumer electronic and automotive industries and the overall
economy; increased marketing and manufacturing competition and accompanying
price 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
other 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.

Through its majority-owned subsidiary NewCom, the Company may grant
limited rights to customers such as price protection and the right to return
certain unsold inventories in exchange for new product purchases. Moreover,
certain of its customers readily accept returned product from their own retail
consumers, and these returned products may be returned to the Company for
credit.

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 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 2. PROPERTIES

The Company owns a 46,000 square foot headquarters facility in El Segundo,
California and a 27,692 square foot manufacturing facility situated in El
Segundo, California for its Automotive/Industrial divisions. These properties
are encumbered by a deed of trust securing a Note in the principal amount of
$5,450,000. The Company leases a 6,000 square foot building in El Segundo for
its machine shop and a 22,000 square foot manufacturing facility in El Segundo
for its Display and Sound and Automotive/Industrial divisions. It leases an
approximate 38,000 square foot ceramics facility in New Hope Minnesota, 5,295
square foot facility in Kansas City, Missouri and, for its NewCom operations,
leases a 33,000 square foot building in Westlake Village, California and a
24,000 square foot warehouse in Chatsworth, CA. Also in Westlake, the Company
leases a facility of approximately 15,230 square feet for AuraSound and
Electrotec. Moreover, Electrotec leases a 5,000 square foot building in
Nashville, Tennessee, as well as an approximately 5,000 square foot building in
Cambridge, England, for its European subsidiary Audiolease Limited. In Kansas
City, Missouri, the Company leases a 61,320 square foot warehouse.

The Company maintains numerous properties worldwide. Through its joint
venture in Malaysia, the Company owns 49% of the factory consisting of
approximately 1.8 acres of land and 18,000 square feet of building, located in
Kangar, Malaysia. With the acquisition of MYS Corporation in Fiscal 1997, the
Company also owns an approximately 25,000 square foot manufacturing facility in
Malaysia.

Through the Company's joint venture in India, it owns 49% of a 32,000
square foot manufacturing facility and 12,500 square foot warehouse/office in
Noida, India, which is close in proximity to New Delhi. The Company operates
offices in Cambridge, England, Moscow, Russia and Osaka, Japan; and has a
showroom in Brussels, Belgium. In total, the Company has approximately 400,000
square feet of facilities and believes that they are adequate for its present
needs.

14
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

The Company is engaged in various legal actions listed below. In the case
of a judgment or settlement, appropriate provisions have been made in the
financial statements.

SHAREHOLDER LITIGATION

Barovich/Chiau v. Aura
----------------------

In May, 1995 two lawsuits naming Aura, certain of its directors and
executive officers and a former officer as defendants, were filed in the United
States District Court for the Central District of California, Barovich v. Aura
----------------
Systems, Inc. et al. (Case No. CV 95-3295) and Chiau v. Aura Systems, Inc. et
- ------------------- ------------------------------
al. (Case No. CV 95-3296), before the Honorable Manuel Real. The complaints
- --
purported to be securities 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 Complaints alleged 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. The
complaints were consolidated as Barovich v. Aura Systems, Inc., et. al.
--------------------------------------

On February 16, 1996, the Company filed a motion for summary judgment which
was granted on April 15, 1996. Judgment in favor of the Company and all
defendants was entered on April 16, 1996. The Plaintiffs filed an appeal in the
United States Court of Appeals for the Ninth Circuit and on January 9, 1998, the
Ninth Circuit issued a memorandum decision reversing the judgment and remanding
the case back to the District Court. On remand, the District Court set a new
summary judgment hearing date for April 13, 1998. The Company filed a renewed
motion for summary judgement on March 20, 1998, and soon thereafter the parties
entered into a letter agreement of settlement, in which Aura agreed to pay $1
million to settle the case. Aura's insurance carrier agreed to pay an additional
$2 million towards the settlement. The insurance carrier reserved its right to
seek recovery from Aura for the $2 million paid for Aura's account. The
insurance carrier's claim will be determined in a separate proceeding filed by
the carrier in the same court (Evanston Insurance Co. v. Aura Systems Inc. et.
-----------------------------------------------
al. (Case No. CV-98-0908)) alleging that Barovich claims are not covered by the
- --- --------
insurance policy. Aura has filed an answer with the court denying these
allegations. The formal settlement papers for Barovich are currently being
--------
negotiated.

Morganstein v. Aura.
--------------------

On April 28, 1997, a lawsuit naming Aura, certain of its directors and officers,
and the Company's independent accounting firm was filed in the United States
District Court for the Central District of California Morganstein v. Aura
-------------------
Systems, Inc., et al. (Case No. CV 97-3103), before the Honorable Steven Wilson.
- --------------------
A follow-on complaint, Ratner v. Aura Systems, Inc., et al. (Case No. CV 97-
-----------------------------------
3944), was also filed and later consolidated with the Morganstein complaint.
-----------
The consolidated amended complaint purports to be a securities class action on
behalf of all persons who purchased common stock of Aura during the period from
January 18, 1995 to April 25, 1997, inclusive. The complaint alleges 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. The complaint contains allegations which assert that the company
violated federal securities laws by selling Aura Common stock at discounts to
the prevailing U.S. market price under Regulation S without informing Aura's
shareholders or the public at large.

On August 25, 1997, the Company filed a motion to dismiss the complaint for
failure to state a claim. The District Court denied the motion on November 24,
1997, set a summary judgment hearing date for May 4, 1998 and set a trial date
for November 3, 1998. The Company filed an answer on December 16, 1997, denying
the allegations of the amended consolidated complaint. On April 13, 1998, the
Company filed a motion for summary judgment. Plaintiff responded by requesting
an extension of time to respond, which the Court granted, setting July 13, 1998
as the date for plaintiffs to file a judgment hearing for August 10, 1998. On
April 28, 1998, the District Court certified the case as a class action, with
the class including all persons who purchased common stock of Aura from January
18, 1995 to April 25, 1997, inclusive. The parties are currently engaged in
discovery.

Securities and Exchange Commission Settlement.
----------------------------------------------

15
<PAGE>

former officer. The proceeding was settled on consent of all the parties,
without admitting or denying any of the Commission's findings. In its order, the
Commission found that Aura and the others violated the reporting, recordkeeping
and anti-fraud provisions of the securities laws in 1993 and 1994 in connection
with its reporting on two transactions in reports previously filed with the
Commission. The Commission's order directs that each party cease and desist from
committing or causing any future violation of these provisions.

The Commission did not require Aura to restate any of the previously issued
financial statements or otherwise amend any of its prior reports filed with the
Commission. Also, the Commission did not seek any monetary penalties from Aura,
Mr. Kurtzman or anyone else. Neither Mr. Kurtzman nor anyone else personally
benefited in any way from these events. For a more complete description of the
Commission's Order, see the Commission's release referred to above.

OTHER LITIGATION

Other Litigation.
-----------------

The Company is also engaged in other legal actions. In the opinion of
management, based upon the advice of counsel, the ultimate resolution of these
matters will not have a material adverse effect.

16
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

17
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

Since 1988, Aura Common Stock has been quoted on the Nasdaq Stock Market
under the trading symbol "AURA". On May 21, 1991, Aura shares became listed on
the Nasdaq National Stock Market.

Set forth below are high and low sales prices for the Common Stock of Aura
for each quarterly period in each of the two most recent fiscal years. 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 had approximately 4,400 stockholders of record as of June
12, 1998.

<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
Fiscal 1997

First Quarter ended May 31, 1996 $5.56 $4.00
Second Quarter ended August 31, 1996 $4.31 $2.50
Third Quarter ended November 30, 1996 $3.31 $1.88
Fourth Quarter ended February 28, 1997 $3.06 $1.75

Fiscal 1998

First Quarter ended May 31, 1997 $2.78 $1.47
Second Quarter ended August 31, 1997 $2.13 $1.50
Third Quarter ended November 30, 1997 $3.94 $2.00
Fourth Quarter ended February 28, 1998 $3.75 $2.25
</TABLE>

On June 12, 1998, the average high and low reported sales price for the
Company's Common Stock was $2.38.

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. The Company does
not anticipate paying any dividends on its Common Stock in the foreseeable
future but has no restrictions preventing it from paying dividends.

18
<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>
Year Ended
--------------------------------------------------------------------
February 28, February 28, February 29, February 28, February 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues $136,715,385 $109,950,202 $ 77,088,850 $ 42,444,213 $ 16,369,825
------------ ------------ ------------ ------------ ------------
Cost of goods and overhead 101,622,051 86,350,828 71,849,204 30,198,196 13,731,946
Research and development expenses 1,395,160 6,022,586 5,225,735 2,037,464 2,286,051

Selling, General and administrative
expenses 45,018,066 18,761,123 26,399,794 12,771,151 6,269,202
------------ ------------ ------------ ------------ ------------
Total costs and expenses 148,035,277 111,134,537 103,474,733 45,006,814 22,287,199
(Loss) from operations (11,319,892) (1,184,335) (26,385,883) (2,429,340) (5,917,374)
Other income and expense
Gain on sale and issuance of
subsidiary stock and other assets (12,952,757) (250,000) -- -- --
Interest expense (income) net 6,827,269 1,415,934 (289,793) 220,539 301,928
Class action litigation and
other settlements 1,700,000 -- -- -- 4,375,000
Termination of license arrangement 3,114,030 -- -- -- --
Equity in losses of unconsolidated
joint ventures 1,937,747 -- -- -- --
Minority interests in income of
consolidated subsidiaries 946,405 -- -- -- --
Provision (benefit) for income taxes (1,256,046) 570,484 -- -- --
------------ ------------ ------------ ------------ ------------
Net (loss) $(11,636,540) $ (2,920,753) $(26,087,090) $(2,649,879) $(10,594,302)
============ ============ ============ ============ ============
Net (loss) per common share - basic $ (.15) $ (.04) $ (.48) $ (.07) $ (.35)
============ ============ ============ ============ ============
Weight average number of
common shares 79,045,290 68,433,521 53,860,527 37,217,673 30,117,742
============ ============ ============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
February 28, February 28, February 29, February 28, February 28,
BALANCE SHEET DATA 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 60,168,895 $ 62,310,715 $ 71,362,882 $ 33,796,181 $ 11,353,783
Total assets 227,302,629 182,528,399 134,080,568 73,467,003 37,564,037
Total liabilities, deferrals and
minority interests 110,400,761 57,050,812 34,917,462 19,213,584 19,488,244
Net stockholders' equity 116,901,868 125,477,587 99,163,106 54,253,419 18,075,793
</TABLE>

19
<PAGE>

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

RESULTS OF OPERATIONS

General

Fiscal 1998 as Compared to Fiscal 1997

The Company continued its activity in development of commercial
application of its proprietary technologies as well as sell commercial products.
The Company has reported a net loss for each of its five most recent fiscal
years.

Revenues

Gross revenues in Fiscal 1998 increased to $161.0 million from $133.8
million, an increase of 20.3%. This was due primarily to an increase in its
sound division and the increase in sales of computer products by the Company's
NewCom subsidiary.

Returns and allowances increased to $24.3 million or 15% of gross revenues
in Fiscal 1998 as compared to $23.9 million or 17.8% of gross revenues in the
prior fiscal year. While the dollar value of the returns increased slightly,
returns as a percentage of gross revenues declined. Most of the returns were due
to the Company's NewCom subsidiary.

Net revenues were $136.7 million as compared to $110.0 million in Fiscal
1997, or an increase of 24.3%. The differences between gross and net revenues
are attributed mostly to the returns and allowances experienced by NewCom.

Sales of computer monitors to two unrelated parties declined to
approximately $10 million in Fiscal 1998 or 6.2% of gross revenues, from $16.5
million or 12.3% of gross revenues in Fiscal 1997. These sales are expected to
continue to decline both in dollar terms and as a percentage of revenues as the
Company continues to expand its product line and its customer base. Although the
Company does not have any long term agreement with any customers, it has no
reason to believe that sales to customers will be abruptly curtailed.

Cost of Goods and Overhead

Cost of goods and overhead increased to $101.6 million in Fiscal 1998 from
$86.4 million in Fiscal 1997. While the dollar value increased as a result of
the increase in sales, as a percentage of net revenues, cost of goods decreased
to 74.3% from 78.5% in the prior fiscal year. As the Company continues to bring
new products to market and introduce new variations of existing products, this
percentage may fluctuate substantially in future periods.

Gross Profit and Net Loss

Gross profit for Fiscal 1998 increased to 25.7% from 21.5% in Fiscal 1997
partially due to the increase in gross profit for the Company's subsidiary
NewCom to 34.8% in Fiscal 1998 from 33.6% in Fiscal 1997.

Due to the increase of the Company's business and in particular as it
relates to consumer electronics, the Company in the fourth quarter increased its
reserve for potential returns of merchandise as well as product obsolescence and
potential bad debts. On a consolidated basis the reserve increased to
approximately $10.5 million or 4.6% of assets as compared to $5.8 million or
3.2% of assets in the prior year.

20
<PAGE>

The following table summarizes the above discussion in the form of
percentages.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------
FY 98 FY 97
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<S> <C> <C>
------------------------------------------------------------------------------
Net Revenues 100 % 100 %
------------------------------------------------------------------------------
Cost of Goods Sold 74.3% 78.5%
------------------------------------------------------------------------------
Gross Margins 25.7% 21.5%
------------------------------------------------------------------------------
SG&A and R&D 33.9% 22.6%
------------------------------------------------------------------------------
Loss from Operations 8.3% 1.1%
------------------------------------------------------------------------------
Net Loss 8.5% 2.7%
------------------------------------------------------------------------------
</TABLE>

During the fourth quarter the Company attended two major tradeshows. The
CES show in January and the SAE show in February. Both of these had a bias
effect on expenses for the fourth quarter by approximately $0.9 million. During
the fourth quarter the Company experienced an incremental increase in interest
of approximately $1.2 million due to the conversion of a $15 million convertible
note to a straight note in September and additional interest incurred on a $10
million financing that occurred in October. Legal expenses increased above other
periods in the fourth quarter as legal activities increased in numerous areas.
After a careful analysis and review of expenses the Company consolidated and
relocated its main warehouse facilities from San Diego, California to Kansas
City, Missouri. The cost of approximately $0.8 million associated with this
consolidation will be saved in approximately one year. Due to uncertainties
created by India's detonation of nuclear devices and U.S. sanctions against
India the Company reserved $3.1 million in license fee due from K&K in India for
the AuraGen. The Company also incurred losses from foreign non-consolidated
Joint Ventures of approximately $1.9 million. After year-end the Company settled
one class action suit and other litigation and took a charge of $1.7 million in
Fiscal 1998.

The following table summarizes certain fourth quarter events that
contributed to the loss in Fiscal 1998 as described above.

<TABLE>
---------------------------------------------------------------------------------

---------------------------------------------------------------------------------
<S> <C>
a. Seasonal expenses during the fourth quarter $0.9 million
---------------------------------------------------------------------------------
b. Increment increase in fourth quarter interest expense $1.2 million
---------------------------------------------------------------------------------
c. Increment increase in fourth quarter legal expenses $0.5 million
---------------------------------------------------------------------------------
d. Consolidate and relocate warehouse facilities in Kansas City $0.8 million
---------------------------------------------------------------------------------
e. Reserve on AuraGen License in India due to US sanctions $3.1 million
---------------------------------------------------------------------------------
f. Loss on foreign joint ventures $1.9 million
---------------------------------------------------------------------------------
g. Legal settlements $1.7 million
---------------------------------------------------------------------------------
TOTAL $10.1 million
----------------------------------------------------------------------------------
</TABLE>

Research & Development

Research and development cost for Fiscal 1998 decreased to $1.4
million from $6.0 million in Fiscal 1997. The Company continues its research and
development in the areas of displays and micromachines, automotive applications
of magnetics and sound systems. As a percentage of net revenues research and
development expenses declined in Fiscal 1998 to 1.0% as compared 5.5% in the
prior year.

Selling, General & Administrative

Selling, general and administrative expenses increased to $45.0 million
in Fiscal 1998 from $18.8 in Fiscal 1997, for an increase of $26.2 million. The
increase is comprised principally of the following: $8.9 million increase from
the NewCom subsidiary; the write-off of $5.0 million in license fees in
connection with the termination of license agreements; an increase in legal fees
over the prior year of approximately $1.0 million; an increase in sales
promotion of approximately $1.5 million, an increase of payroll and associated
benefits of approximately $2.7 million with the addition of 40 new employees and
an increase in depreciation and amortization of approximately $1.3 million.

21
<PAGE>

Bad Debt Expense

Bad debt expense in Fiscal 1998 increased to $3.6 million from $.8
million in Fiscal 1997.

Interest Expense

Net interest expense for Fiscal 1998 was $6.8 million as compared to net
interest expense of approximately $1.4 million in the prior fiscal year. The
increase was due to increased lines of credit for NewCom that were utilized
throughout the year, higher levels of debt issued by the Company, premiums paid
on the repurchase of convertible notes, and a higher interest rate on a $15
million note.

Fiscal 1997 as Compared to Fiscal 1996

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.

Revenues

Gross revenues in Fiscal 1997 increased to $133.80 million from $82.26
million, primarily as a result of the acquisition of MYS Corporation in March of
1996, and the increase in sales of computer products by the Company's NewCom
subsidiary. The MYS subsidiary accounted for approximately $20 million in sales
in Fiscal 1997, all in the sound area.

Net revenues were $109.95 million as compared to $77.01 million in Fiscal
1996 an increase of 42.8%. The differences between gross and net revenues are
attributed mostly to returns and allowances experienced at NewCom.

Sales of computer monitors to a single unrelated party declined to
approximately $16.5 million in Fiscal 1997 or 12.3% of revenues in the current
year down from $20.6 million or 25.1% of revenues in Fiscal 1996. These sales
are expected to continue to decline both in dollar terms and as a percentage of
revenues as the Company continues to expand its product line and its customer
base. Although 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.

Returns and allowances increased to $23.85 million or 17.8% of revenues
in Fiscal 1997 as compared to $5.17 million or 6.3% of revenues in the prior
fiscal year. The increase was due largely to a problem in the middle part of the
year with a chip on the DSVD modem that the Company's NewCom subsidiary sells.
The problem necessitated returning the modems to the Company, reprogramming the
chips, and then redistributing the modems to customers.

Net Loss

The Company's net loss for Fiscal 1997 was $2.92 million compared to a
net loss of $26.09 million in the prior fiscal year. This improvement was a
result primarily of the prior year discontinuance of the Interactor and the
improvement in the NewCom subsidiary, along with the improvement in the sound
area. The improvement in the sound area is a result partially of the
transformation of the operations of AuraSound and the introduction of new
products into the marketplace.

Certain fourth quarter events contributed to the loss in Fiscal 1997 as
follows:

<TABLE>
<CAPTION>
Millions
--------
<S> <C>
a) Seasonal expenses during the fourth quarter $1.50
b) Business focus, consolidation and sale of unprofitable operations 1.00
c) Reserves increases for potential product obsolescence 2.26
-----
TOTAL $4.76
=====
</TABLE>

The Company attends three major tradeshows throughout the year. Comdex in
late November, CES in January and SAE in February. In particular the CES and SAE
tradeshows have a bias effect on expenses by approximately $850,000 in the
fourth quarter. In addition, due to the holiday season, NewCom advertisement
expenses are biased in the fourth quarter by approximately $700,000. Thus, the
Company spends approximately $1.5 million more on tradeshows and advertising in
the fourth quarter than other quarters throughout the year.

22
<PAGE>

During Fiscal 1997, the Company acquired MYS Corporation and its
subsidiaries in both Portland, Oregon and Malaysia. In August the Company
acquired PSL of Kansas City, and in September, Revolver U.K. Ltd. in the United
Kingdom. (See Sound related Products). During the fourth quarter the Company
closed the Portland operation and moved the activities to El Segundo. Similarly
during the fourth quarter the Company consolidated the Kansas City operation of
PSL into the El Segundo operation by transferring personnel and converting the
Kansas City operation into a warehouse for distribution in the Midwest and
central part of the country. The relocation of the Portland operation as well as
the Kansas City operation have resulted in extra expenses and some personnel
cuts. The combined operation of Portland and PSL incurred a loss of
approximately $500,000 in the fourth quarter.

Throughout the year the Company has focused its business into its four
operating divisions (See Introduction). Part of this focus has been the
consolidation of operations as described above and also the sale of operations
that no longer fit into the Company's long term business strategy. During the
fourth quarter the Company sold Delphi. The Delphi operation incurred a loss of
approximately $900,000 for the year of which $500,000 was related to the fourth
quarter. Subsequent to year end the Company has sold Aura Precision which
incurred a loss of approximately $700,000 for the year and $250,000 in the
fourth quarter.

Aura Ceramics had experienced technical difficulties on a specific
contract. This problem caused major delays in shipment during the second half of
the year. The Company and the customer ultimately agreed to terminate the
contract. Aura Ceramics incurred a loss of approximately $1.1 million for the
year of which $500,000 was in the fourth quarter. The operation would have made
approximately $300,000 in profit for the year after adjusting for the problem
described.

The Company's operation in Japan (see MYS Corporation) recorded income
before tax for the year of approximately $800,000. The Company recorded
approximately $520,000 provision for income tax in Japan during the fourth
quarter.

Due to the increase of the Company's business and in particular as it
relates to consumer electronics, the Company in the fourth quarter increased its
reserve for product obsolescence as well as a reserve for potential returns of
merchandise.

Cost of Goods and Overhead

Cost of goods and overhead expenses increased from $71.85 million in
Fiscal 1996 to $86.35 million in Fiscal 1997 as a result of the acquisition of
MYS Corporation and the increase in the sale of the Company's products. The
increase in sales required a corresponding increase in products and materials
purchased to manufacture the Company's products and an increase in the overhead
costs associated with the expanded operations. As a percentage of net revenues,
cost of goods and overhead, expenses decreased in Fiscal 1997 to 78.5% from,
93.1% in the prior year.

Research & Development

Research and development costs for the Fiscal 1997 increased to $6.0
million from $5.2 million in Fiscal 1996. The Company continues its research and
development in the areas of displays and micromachines, automotive applications
of magnetics and sound systems. As a percentage of net revenues research and
development expenses declined in Fiscal 1997 to 5.5% as compared to 6.8% in the
prior year. During Fiscal 1997 the Company shifted from the research and
development stage to the pre-production phase on a number of products.

Selling, General & Administrative

Selling, general and administrative expenses decreased to $18.76 million
from $26.39 million in Fiscal 1996. The decline in Selling, General and
Administrative expenses in Fiscal 1997 from Fiscal 1996 can be mostly attributed
to the reduction in cost in advertisement expenses (approximately $2.7 million),
reduction in bad debt (approximately $2.3 million), a reduction in the total
tradeshows attended and the cost reduction associated with the major shows
particularly the January 1997 CES in Las Vegas (approximately $1.2 million),
reduction of consultants and changes in the composition of personnel
(approximately $1.5 million). The total number of employees in Selling, General
and Administrative functions increased during Fiscal 1997 from Fiscal 1996,
however the payroll expense decreased due to the reduction of high salaried
individuals. As a percentage of net revenues, SG&A for 1997 decreased to 16.9 %
as compared to 34.2% for the prior year.

23
<PAGE>

Bad Debt Expense

Bad debt expense in Fiscal 1997 decreased to $1.77 million from $4.1
million in Fiscal 1996. The prior year expense was adversely affected by
customers declaring bankruptcy which resulted in writeoffs in the prior year of
approximately $2.0 million.

Interest Expense

Net interest expense for Fiscal 1997 was $1.42 million as compared to net
interest income of approximately $300,000 in the prior fiscal year. The decrease
was due primarily to increased lines of credit that were utilized throughout the
year.

LIQUIDITY AND CAPITAL RESOURCES

Net working capital decreased by $2,141,820 to $60,168,895 at Fiscal 1998
year end, with the current ratio decreasing to 1.76 from 2.54:1. The principal
differences in the Company's accounts from February 28, 1997 to February 28,
1998 are a decrease in cash and equivalents of $1,032,943, an increase in net
receivables of $674,443, an increase in inventories of $24,866,579, an increase
in notes payable of $16,288,005, an increase in accounts payable and accrued
expenses of $22,365,696, and an increase in current notes payable of
$16,288,005.

The Company's cash balances were $6,079,411 at February 28, 1998,
$7,112,354 at February 28, 1997 and $21,900,364 at February 29, 1996.

The net cash used in operating activities of 29,622,652 increased by
$16,052,271 due primarily to the increase in the net loss incurred and the
increase in inventories, offset partially by an increase in the level of
accounts payable.

The level of inventories has increased primarily due to the Company's
NewCom subsidiary. NewCom's inventory increased by $29.7 million, while the
consolidated inventory increased by only $24.9 million. Overall excluding NewCom
the Company's inventory decreased by $4.8 million.

In Fiscal 1998 the Company invested $.6 million in various joint-
ventures, compared to $7.2 million in the prior year. In Fiscal 1997 the Company
formed a joint venture for simulators with a group in Europe. The Company
contributed approximately $3.8 million of assets, consisting of 6 DOF (6 Degree
of Freedom) and 2 DOF simulators and related hardware for a 40% equity in the
joint venture. The $3.8 million contribution is included in the $7.2 million
above.

In Fiscal 1998, the Company raised $584,850 from the exercise of
warrants, $900,000 form the sale of warrants and $51,500 from the exercise of
stock options. The Company also received proceeds of $34,500,000 from the
issuance of notes payable.

In March 1997 the Company issued $15 million of convertible Debentures to
a group of accredited investors in a private placement. The Debentures were
convertible into Common Stock of the Company in accordance with a stated
formula. In October 1997 the Company and the investors entered into an Agreement
modifying the Debentures to eliminate the conversion feature in exchange for
increasing the interest rate on the principal to 18% and the payment of a
quarterly fee of $935,000 for each quarter during which the Debentures remain
outstanding. The stated maturity of the Debentures was shortened from March 2000
to September 1998. The Debentures, as modified, are secured by a Note from
NewCom to Aura in the original principal amount of $17 million and 1,250,000
shares of NewCom stock, subject to adjustment under certain circumstances. As
part of the modification, the Company issued warrants for an aggregate of
2,500,000 shares of Common Stock at an exercise price of $2.50 per share,
subject to potential adjustment after one year under certain circumstances.

In June 1997 the Company issued a $4 million convertible debenture in a
private placement to a single accredited investor. The debenture accrues
interest at the rate of 7% per annum, payable quarterly, and is due and payable
in June 1999. The Debenture was convertible into shares of the Company's Common
Stock at the then current market price at the time of conversion.

On October 30, 1997, the Company sold $10 million of Convertible
Debentures to a single institutional investor. The Debentures bear interest at
the rate of 7% per annum, payable quarterly, with the entire principal amount
due and payable on October 30, 2002, subject to prior redemption or conversion.
The Debentures are convertible, at the option of the holder, into the Company's
Common Stock at a fixed conversion price of $3.04 per share, which was 110% of
the average closing bid price of the Common Stock over the five trading days
ending on the day prior to the

24
<PAGE>

closing of the financing. As part of the financing, the investor received
3,619,910 five-year Warrants, exercisable at $2.85 per share.

On December 31, 1997, the Company issued and sold Convertible Debentures
in the aggregate amount of $5.5 million to two institutional investors. The
Debentures bear interest at the rate of 7% per annum, payable quarterly, with
the entire principal amount due and payable on December 31, 2002, subject to
prior redemption or conversion. The Debentures are convertible, at the option of
the holder, into the Company's Common Stock at a fixed conversion price of $3.81
per share. As part of the financing, the investors received warrants to purchase
up to 1,585,865 shares of common stock exercisable at $3.81 per share for five
years. On June 3, 1998, the Company entered into an agreement with one of the
investors to reduce the exercise price of 1,009,009 Warrants from $3.81 to $2.50
and to fully exercise the Warrants. The Company further agreed that if the
average bid price for the five trading days ending December 15, 1998 is less
than $2.50, the Company would further reduce the exercise price retroactively by
issuing to the investor additional shares to reflect the difference between the
current exercise price and the market price in December 1998. In addition, the
Company issued to the investor two new Warrants: a five year Warrant exercisable
for 1,009,009 shares of Common Stock at an exercise price equal to the lesser of
$2.52 and the average closing bid price over the 15 trading days beginning June
15, 1998; and a five year warrant exercisable for 756,757 shares of Common Stock
at an exercise price of $3.50.

On March 30, 1998, the Company sold $8 million of Convertible Debentures
to a single institutional investor for cash. The Debentures bear interest at the
rate of 7% per annum, with the entire principal amount due and payable on March
30, 2003, subject to prior redemption or conversion. The Debentures are
convertible, at the option of the holder, into Common Stock at a fixed
conversion price of $3.13 per share. As part of the financing, the investor
received warrants to purchase up to 2,415,094 shares exercisable at $3.64 per
share.

In May 1998 the Company completed a refinancing of two properties owned
by Aura in El Segundo, consisting of its headquarters and an adjacent facility.
As part of the financing the Company encumbered these properties with a first
deed of trust securing a Note in the amount of $5,450,000, resulting in net cash
to the Company of approximately $3.0 million.

Spending for property and equipment amounted to $18,006,394 for Fiscal
1998, $25,146,585 in Fiscal 1997 and $7,301,729 in Fiscal 1996. Of the Fiscal
1998, 1997 and 1996 amounts, $16,096,180, $16,539,899 and $363,274 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.

The Company's cash flow generated from operating activities has to date
not 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, equity 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 1999, 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, Display and Computer products.

Current fixed monthly expenses corporate wide, average approximately
$3,500,000, principally for labor, overhead, travel and professional fees.

The Company and its subsidiaries lease space located in El Segundo,
Westlake Village, and Chatsworth, all

25
<PAGE>

in California and in New Hope, Minnesota, Nashville, Tennessee and Kansas City,
Missouri. Minimum monthly rents under the leases approximate $55,000. Rent
expense was approximately $1.3 million for Fiscal 1998, $1.3 million for Fiscal
1997, and $900,000 for Fiscal 1996. The Company has no other material long-term
capital commitments.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1997, the financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement which is effective for fiscal years beginning after December 15, 1997
requires the Company to make certain disclosures but has no impact on the
Company's financial statements.

YEAR 2000

In accordance with U.S. Securities and Exchange Commission's Staff Legal
Bulletin No. 5, the Company has assessed both the cost of addressing and the
costs or consequences of incomplete or untimely resolution of the Year 2000
issue. Most of the Company's major systems have already been updated or
replaced with applications, in the normal course of business, that are Year 2000
compliant. Accordingly, the Company has determined that its estimated costs
related to the Year 2000 issue are not anticipated to be material to the
Company's business, operations or financial condition.

In addition, the Company is in process of initiating formal communication
with its significant suppliers and large customers to determine the extent to
which the Company is vulnerable to those third parties failure to remediate
their own Year 2000 Issues. The Company can give no guarantee that the systems
of other companies on which the Company's systems rely will be converted on time
or that a failure to convert by another company would not have a material
adverse effect on the Company.

ASIAN FINANCIAL CRISIS

The ongoing financial crisis in Asia may have a negative effect on the
Company's cash flow due to the potential requirements for cash advances to Asian
vendors in order to ensure an adequate flow of product.

26
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

27
<PAGE>

PART III

ITEM 10. DIRECTORS AND 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.

<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------

DIRECTORS
---------
<S> <C> <C>
Zvi Kurtzman 52 Chief Executive Officer, Chairman, Board of Directors
Gerald S. Papazian 42 President and Chief Operating Officer, Director, member of
Executive, Personnel and Science and Technology Committees
Arthur J. Schwartz, Ph.D. 50 Executive Vice President, Director, member of Executive,
Investment and Science and Technology Committees
Cipora Kurtzman Lavut 42 Senior Vice President, Corporate Communications, Director, member
of Executive, Investment and Personnel Committees
Neal B. Kaufman 53 Senior Vice President, Director, member of Executive, Personnel
and Science and Technology Committees
Steven C. Veen 42 Senior Vice President and Chief Financial Officer, Director,
member of Audit, Executive and Investment Committees
Harvey Cohen 65 Director, member of Audit, Investment and Science and Technology
Committees
Norman Reitman 75 Director, member of Audit, and Investment Committees
Brigadier Ashok Dewan 59 Director, member of Audit, Compensation and Investment
Committees
Peter Liu 50 Director, member of Audit, Compensation and Investment Committees
Salvador Diaz-Verson, Jr. 46 Director, member of Audit, Compensation and Investment Committees

OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
------------------------------------------

Michael Froch 36 General Counsel and Secretary
Gregory Um, Ph.D. 50 President, Aura Display
Keith O. Stuart 42 President Tech Center
Ronald J. Goldstein 57 President Aura Automotive
Jacob Mail 48 Vice President Operations Planning
Yoshikazu Masayoshi 57 Chairman, AuraSound, President, MYS Corporation
</TABLE>

ZVI KURTZMAN is the CEO and Chairman of the Board of Directors of the Company
and has served in this capacity since 1987. Mr. Kurtzman also served as the
Company's President from 1987 to 1997. 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. For information regarding
certain legal proceedings to which Mr. Kurtzman was a party, see "Legal
Proceedings-Securities and Exchange Commission Settlement."

28
<PAGE>

ARTHUR J. SCHWARTZ, PH.D. is the Executive Vice President and director of the
Company since February 1987. 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 is Senior Vice President Corporate Communications and has
served in this capacity since 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. She graduated in 1984 from
California State University at Northridge with a B.S. degree in Business
Administration.

NEAL B. KAUFMAN is Senior Vice President of Aura, and has served in this
capacity since 1988. Mr. Kaufman is also a director of the Company and has
served in this capacity since 1989. 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.

STEVEN C. VEEN a certified public accountant, is the Chief Financial Officer and
has served in this capacity since 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. Mr. Veen also serves as a director of NewCom, Inc. and Chief Financial
Officer.

GERALD S. PAPAZIAN has been the Company's President and Chief Operating Officer
since July 1997. He has been with Aura Systems for ten years and has been
involved in the day-to-day operations of the Company with direct responsibility
for contract administration, purchasing, inventory control, logistics,
warehousing, shipping and receiving and human resources. He joined the Company
in August 1988 from Bear, Stearns & Co., an investment banking firm, where he
served from 1986 as Vice President, Corporate Finance. His responsibilities
there included valuation of companies for potential financing, merger or
acquisition. Prior to joining Bear Stearns, Mr. Papazian was an Associate in
the New York law firm of Stroock & Stroock & Lavan, where he specialized in
general corporate and securities law with the extensive experience in public
offerings. He received a BA, Economics (magna cum laude) from the University of
Southern California in 1977 and a JD and MBA from the University of California,
Los Angeles in 1981. He currently serves as a trustee of the University of
Southern California. Mr. Papazian also serves on the Board of Directors of
NewCom, Inc.

HARVEY COHEN is a director of the Company and has served in this capacity 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. Mr. Cohen received his B.S.
(Honors) in Electrical Engineering in 1955 and an MBA in 1957 from Harvard
University.

NORMAN REITMAN is a director of the Company and has served in this capacity
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

29
<PAGE>

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.

BRIGADIER ASHOK DEWAN is a director of the Company and has served in this
capacity since September 1997. Mr. Dewan is the founder and Chairman of K&K
Enterprises of India (K&K), since its formation in 1986. K&K is engaged in the
manufacture, sale and distribution of consumer electronics, and has been on OEM
supplier to companies such as Philips, ASM, JBL and Infinity Systems. In 1995,
Aura and K&K formed a joint venture, Dewan-Aura, which manufactured and sold
Aura's speakers and Bass Shakers in the republic of Taiwan, the Indian
subcontinent, Middle East and Europe. In 1989, Mr. Dewan founded Chand
International, which is engaged in the manufacture and sale of garments, and has
served as its Chairman since its formation.

PETER LIU is a director of the Company and has served in this capacity since
September 1997. Mr. Liu is the Chairman and CEO of W I Harper Group. As
Chairman and co-founder of W I Harper Group, Mr. Liu directs and implements both
W I Harper Group corporate and client Asia-Pacific market and business
development strategies. Mr. Liu has established relationships with prominent,
key officials and executives in both private and public sectors of China, as
well as throughout other major Asian economic communities. Mr. Liu was General
Partner of the Walden Group of Venture Capital Funds and the Executive Vice
President and Director of IVCIC, Walden's fund based in Taiwan. Before co-
founding IVCIC, Mr. Liu served as the President of Marsquare International, an
international trade and merchandising company based in San Francisco. Mr. Liu
was a co-founder of California National Bank and served as partner of Chester
International, a management consulting firm focused on international business
development. Mr. Liu earned a Bachelor of Science degree and a Masters Degree
in Business Administration from the University of California at Berkeley.

SALVADOR DIAZ-VERSON, JR. is a director of the Company and has served in this
capacity since September 1997. Mr. Diaz-Verson is the founder, and since 1991
has been the Chairman and President of Diaz-Verson Capital Investments, Inc., an
Investment Adviser registered with the Securities and Exchange Commission. Mr.
Diaz-Verson served as president and member of the Board of Directors of American
Family Corporation (AFLCAC Inc.) a publicly held insurance holding company, from
1979 until 1991. Mr. Diaz-Verson also served as Executive Vice President and
Chief Investment Officer of American Family Life Assurance Company, subsidiary
of AFLCAC Inc. from 1976 through 1991. Mr. Diaz-Verson is a graduate of Florida
State University. He is currently a director of the board of Miramar
Securities, Clemente Capital Inc., Regions Bank of Georgia and The Philippine
Strategic Investment Holding Limited.

MICHAEL I. FROCH is General Counsel and Secretary of the Company. He has served
as General Counsel since March 1997 and as Secretary since July 1997. He also
serves as Director and Secretary of NewCom, Inc., the Company's majority owned
subsidiary. He joined the Company in 1994 as corporate counsel. From 1991
through 1994, Mr. Froch was engaged in private law practice in California. Mr.
Froch is admitted to the California and District of Columbia bars. He received
his Juris Doctor degree from Santa Clara University School of Law in 1989,
during which time he served as judicial extern to the Honorable Spencer M.
Williams, United States District Judge for the Northern District of California.
He received his A.B. degree from the University of California at Berkeley in
1984, serving from 1982 through 1983 as Staff Assistant to the Honorable Tom
Lantos, Member of Congress.

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 is President of the Research Center and has served in this
capacity since 1995. Previously he served as Vice President in charge of
Hardware Development for Aura since 1988 and as a Program manager 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 Cyphermaster, Inc. 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

30
<PAGE>

Space Defense Initiative and has also developed a multi-computer automated test
station for the evaluation of sophisticated electro-optical devices.

RONALD J. GOLDSTEIN is President of Automotive and has served in this capacity
since 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.

JACOB MAIL is Vice President, Operational Planning and has served in this
capacity since 1995. 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.

YOSHIKAZU MASAYOSHI is Chairman of AuraSound and President of MYS Corporation,
joining the Company in Fiscal 1997 as part of Aura's acquisition of MYS and its
subsidiaries. Mr. Masayoshi has been with MYS since its founding in 1986 and
has, during that time, extended the Japan based R&D center and created the MYS
factory in Malaysia. Prior to joining MYS, he served as the Senior Vice
President of Jyoto Works Co., Ltd., from 1963 to 1986, where he marketed speaker
components to loudspeaker manufacturers worldwide. Mr. Masayoshi holds a B.A.
from Kinki University of Osaka, Japan.

FAMILY RELATIONSHIPS

Cipora Kurtzman Lavut, a Senior Vice President and director, is the sister
of Zvi Kurtzman, who is the Chief Executive Officer/President and a director of
the Company. Jacob Mail, Vice President, Operational Planning is a first cousin
of Cipora Kurtzman Lavut and Zvi Kurtzman.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and beneficial
owners of more than ten percent of the Common Stock, to file with the Securities
and Exchange Commission and the National Association of Securities Dealers, Inc.
reports of ownership and changes in ownership of the Common Stock. Copies of
such reports are required to be furnished to the Company. Based solely on its
review of the copies of such reports furnished to the Company, or written
representations that no reports were required, the Company believes that during
its fiscal year ended February 28, 1997, all filing requirements applicable to
its officers, directors, and ten percent beneficial owners were satisfied.

DELINQUENT SEC FILINGS

None

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from the
registrant's Proxy Statement to be filed pursuant to regulation 14A under the
Securities Act of 1934 in connection with the company's 1998 Annual Meeting of
Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT

The information required by this Item is incorporated by reference from the
registrant's Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Act of 1934 in connection with the Company's Annual Meeting of the
Shareholders.

31
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

32
<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 at page F-1

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

See Index to Consolidated Financial Statements at page F-1

3. Exhibits
--------

See Exhibit Index

(b) Reports on Form 8-K

No reports on Form 8-K were filed in the quarter ended February 28, 1998.

33
<PAGE>

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

(1) 3.1 Certificate of Incorporation of Registrant.

(1) 3.2 Bylaws of Registrant.

(1) 10.1 Aura Systems, Inc. 1987 Stock Option Plan for Non-Employee Directors.

(1) 10.2 Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement.

(2) 10.3 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) 10.4 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) 10.5 Form of 7% Secured Convertible Non-Recourse Notes due 1999.

(2) 10.6 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) 10.7 Form of 7% Secured Convertible Non-Recourse Note due 2000.

(4) 10.8 1989 Stock Option Plan.

(5) 10.9 Joint Development and License Agreement, dated August 24, 1992,
between the Registrant and Daewoo Electronics Co., Ltd.

(6) 10.10 Agreement, dated September 23, 1993, between the Registrant and
Burlington Technopole SDN. BHD.

(7) 10.11 Dedicated Supplier Agreement, dated December 2, 1993, between the
Registrant and Daewoo Electronics Co., Ltd.

(8) 10.12 Form of 7% Secured Convertible Non-Recourse Note due 2002.

(9) 10.13 Agreement dated July 19, 1995 between the Company and K&K
Enterprises.

(9) 10.14 Agreement dated July 19, 1995 between the Company and K&K
Enterprises.

(9) 10.15 Agreement dated July 12, 1995 between the Company and K&K
Enterprises.

(9) 10.16 Agreement dated July 12, 1995 between the Company and K&K
Enterprises.

(9) 10.17 Stock Purchase and Sale Agreement dated April 30, 1996 between the
Company and MYS Corporation

(9) 10.18 Joint Venture Agreement dated July 26, 1995 between the Company and
Microbell

21.1 Aura Systems, Inc. and Subsidiaries

23.1 Consent of Pannell Kerr Forster

EX-27 Financial Data Schedule

34
<PAGE>

FOOTNOTES
---------

(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 Registrants Current Report in Form 10-Q
dated November 30, 1993.

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

(8) Incorporated by reference to the Exhibits to the registrants Annual Report
Form 10-K for the fiscal year ended February 28, 1994 (File No. 0-17249).

(9) Incorporated by reference to the Registrants Annual Report Form 10-K for
the fiscal year ended February 29, 1996 (File No. 0-17249)

35
<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 12, 1998 AURA SYSTEMS, INC.

By: /s/Zvi Kurtzman
--------------------------------------
Zvi Kurtzman, Chief Executive Officer

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.

<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Zvi Kurtzman Chief Executive Officer and Director June 12, 1998
- -----------------------------------
Zvi Kurtzman (Principal Executive Officer)

/s/ Steven C. Veen Senior Vice President, June 12, 1998
- -----------------------------------
Steven C. Veen Chief Financial Officer
(Principal Financial and Accounting Officer)

/s/ Gerald S. Papazian President and Director June 12, 1998
- -----------------------------------
Gerald Papazian

/s/ Arthur J. Schwartz Executive and Vice President and Director June 12, 1998
- -----------------------------------
Arthur J. Schwartz

/s/ Neal Kaufman Senior Vice President and Director June 12, 1998
- -----------------------------------
Neal B. Kaufman

/s/ Cipora Kurtzman Lavut Senior Vice President and Director June 12, 1998
- -----------------------------------
Cipora Kurtzman Lavut

/s/ Ashok Dewan Director June 12, 1998
- -----------------------------------
Ashok Dewan

/s/ Peter Liu Director June 12, 1998
- -----------------------------------
Peter Liu

/s/ Salvador Diaz-Verson Director June 12, 1998
- -----------------------------------
Salvador Diaz-Verson

/s/ Norman Reitman Director June 12, 1998
- -----------------------------------
Norman Reitman

/s/ Harvey Cohen Director June 12, 1998
- -----------------------------------
Harvey Cohen
</TABLE>

36
<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 28, 1998 and February 28, 1997 F-3 to F-4
Consolidated Statements of Operations-Years ended February 28, 1998,
February 28, 1997 and February 29, 1996 F-5
Consolidated Statements of Stockholders' Equity-Years ended
February 28, 1998, February 28, 1997 and February 29, 1996 F-6
Consolidated Statements of Cash Flows-Years ended February 28, 1998,
February 28, 1997 and February 29, 1996 F-7 to F-8

Notes to Consolidated Financial Statements F-9 to F-25

Consolidated Financial Statement Schedule:
II Valuation and Qualifying Accounts F-26
</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 28, 1998, and February 28, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended February 28, 1998 and the related
financial statement schedule listed in the accompanying Index at Page F-1. 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 28, 1998, and February 28, 1997 and the results
of their operations and their cash flows for each of the three years in the
period ended February 28, 1998, 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

Los Angeles, California
June 10, 1998

F-2
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets

<TABLE>
<CAPTION>
February 28, February 28,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:

Cash and equivalents $ 6,079,411 $ 7,112,354
Receivables, net 54,418,141 53,743,698
Inventories and contracts in process 58,713,875 33,847,296
Prepayments to vendors 13,326,789 7,695,268
Other current assets 5,925,642 391,361
Deferred income taxes 838,000 --
------------ -------------

Total current assets 139,301,858 102,789,977
------------ -------------

PROPERTY AND EQUIPMENT, AT COST 66,667,671 52,867,243
Less accumulated depreciation and amortization (11,888,586) (9,676,454)
------------ -------------
Net property and equipment 54,779,085 43,190,789

JOINT VENTURES 6,903,918 10,210,872
LONG-TERM INVESTMENTS 7,476,299 6,534,498
LONG-TERM RECEIVABLES 3,627,098 6,974,242
PATENTS AND TRADEMARKS-NET 6,410,771 2,905,870
GOODWILL, NET 6,146,642 6,540,990
OTHER ASSETS 2,656,958 3,381,161
------------ -------------
Total $227,302,629 $ 182,528,399
============ =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets

<TABLE>
<CAPTION>
February 28, February 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:

Notes payable $ 31,147,572 $ 14,859,567
Accounts payable 43,995,364 23,716,251
Accrued expenses 3,990,027 1,903,444
------------ ------------
Total current liabilities 79,132,963 40,479,262
------------ ------------
3,282,003 4,458,650
NOTES PAYABLE AND OTHER LIABILITIES ------------ ------------

CONVERTIBLE NOTES-SECURED 2,112,900 3,662,900
------------ ------------
CONVERTIBLE NOTES-UNSECURED 15,500,000 8,450,000
------------ ------------
MINORITY INTERESTS IN SUBSIDIARIES 10,372,895
------------ ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock par value $.005 per share and additional
paid in capital. Issued and outstanding 80,001,244 and 199,100,614 196,039,793
76,481,666 shares respectively.

Accumulated deficit (82,198,746) (70,562,206)
------------ ------------

Total stockholders' equity 116,901,868 125,477,587
------------ ------------
Total $227,302,629 $182,528,399
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended February 28, 1998, February 28, 1997 and February 29, 1996

<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
GROSS REVENUES $161,040,266 $133,802,370 $ 82,259,010

LESS RETURNS AND ALLOWANCES (24,324,881) (23,852,168) (5,170,160)
------------ ------------ ------------
NET REVENUES 136,715,385 109,950,202 77,088,850

COST OF GOODS AND OVERHEAD 101,622,051 86,350,828 71,849,204
------------ ------------ ------------

GROSS PROFIT 35,093,334 23,599,374 5,239,646
------------ ------------ ------------

EXPENSES:
Research and development 1,395,160 6,022,586 5,225,735
Selling, general and administrative expenses 45,018,066 18,761,123 26,399,794
------------ ------------ ------------
Total expenses 46,413,226 24,783,709 31,625,529
------------ ------------ ------------

(LOSS) FROM OPERATIONS (11,319,892) (1,184,335) (26,385,883)

OTHER (INCOME) AND EXPENSES

Gain on sale and issuance of subsidiary stock
and other assets (12,952,757) (250,000) --
Legal settlements 1,700,000 -- --
Equity in losses of unconsolidated joint ventures 1,937,747 -- --
Termination of license arrangement 3,114,030 -- --
Interest income (224,385) (475,758) (647,717)
Interest expense 7,051,654 1,891,692 348,924
------------ ------------ ------------

(LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS (11,946,181) (2,350,269) (26,087,090)
Provision (benefit) for taxes (1,256,046) 570,484 --
Minority interests in income of consolidated
subsidiaries 946,405 -- --
------------ ------------ ------------

NET (LOSS) $(11,636,540) $ (2,920,753) $(26,087,090)
============ ============ ============

NET (LOSS) PER COMMON SHARE-BASIC $ (.15) $ (.04) $ (.48)
============ ============ ============

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 79,045,290 68,433,521 53,860,527
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Years ended February 28, 1998, February 28, 1997 and February 29, 1996

<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
------------
Shares Amount capital Deficit Total
---------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
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)
Net (loss) -- -- -- (26,087,090) (26,087,090)
---------- ------- ----------- ----------- -----------
Balances at February 29, 1996 62,222,438 311,112 166,534,089 (67,682,095) 99,163,106

Private placements, net of
issuance cost 385,000 1,925 1,499,575 -- 1,501,500
Notes payable converted 12,815,368 64,077 24,679,389 -- 24,743,466
Exercise of warrants 300,000 1,500 598,500 -- 600,000
Exercise of stock options 10,000 50 34,950 -- 35,000
Stock issued to acquire assets 748,860 3,744 2,310,882 -- 2,314,626
Foreign currency translation gain -- -- -- 40,642 40,642
Net (loss) -- -- -- (2,920,753) (2,920,753)
---------- ------- ----------- ----------- -----------

Balances at February 28, 1997 76,481,666 382,408 195,657,385 (70,562,206) 125,477,587

Notes payable converted 3,164,001 15,820 4,528,958 -- 4,544,778
Exercise of warrants 241,688 1,208 583,642 -- 584,850
Exercise of stock options 25,000 125 51,375 -- 51,500
Proceeds from issuance of
warrants -- -- 900,000 -- 900,000
Repurchase of warrants -- -- (1,679,956) -- (1,679,956)
Stock issued to acquire assets 88,889 445 199,555 -- 200,000
Expenses of issuances (1,540,351) -- (1,540,351)
Net (loss) -- -- -- (11,636,540) (11,636,540)
---------- ------- ----------- ----------- -----------

Balance at February 28, 1997 80,001,244 $400,006 $198,700,608 $(82,198,746) $116,901,868
========== ======= =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years ended February 28, 1998, February 28, 1997 and February 29, 1996

<TABLE>
<CAPTION>
1998 1997 1996
-------------- ---------------- ---------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (11,636,540) $ (2,920,753) $ (26,087,090)
----------- ----------- ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 8,362,110 4,797,436 4,246,133
Shares contributed to ESOP -- -- 241,033
Provision for environmental cleanup 40,597 37,021 33,765
Gain on disposition of assets (555,326) (255,665) --
Reduction of asset carrying value -- 2,005,000 1,203,972
Shares issued for payment of inventory purchases -- -- 3,744,241
Foreign exchange loss -- 172,617
Equity in losses of unconsolidated joint ventures 1,937,747 -- --
Gain on subsidiary stock (12,144,740) -- --

Assets-(Increase) Decrease:

Receivables (674,443) (12,830,713) (9,178,666)
Inventories and contracts in process (24,866,579) (9,410,343) (10,844,934)
Prepayments to vendors (5,631,521) -- --
Other current assets (5,534,281) 1,245,613 (7,296,782)
Income tax assets (940,000) -- --

Liabilities-Increase (Decrease):
Accounts payable 20,279,113 3,270,971 8,581,670
Accrued expenses 2,086,583 323,435 544,383
Accrued losses on contracts -- -- (133,261)
Other liabilities (345,372) -- --
------------ ------------ ------------
Total adjustments (17,986,112) (10,644,628) (8,858,446)
------------ ------------ ------------

Net cash used by operating activities (29,622,652) (13,565,381) (34,945,536)
------------ ------------ ------------
Cash flows from investing activities:

Proceeds from sale of assets 920,000 286,217 --
Purchase of property and equipment (1,910,214) (8,606,686) (6,938,455)
Manufacture of special tools and equipment (16,096,180) (16,539,899) (363,274)
Purchase of subsidiary -- (1,101,278) --
Change in investment in joint ventures 1,202,138 (3,163,475) (2,439,106)
Long-term investments (1,117,465) (2,430,756) (4,165,000)
Long-term receivables 3,347,144 (2,450,959) (4,414,344)
Patents and trademarks (1,903,718) (696,677) (337,113)
Goodwill and other assets (2,398,400) (645,241) (1,121,500)
Proceeds from subsidiary stock 5,472,656 -- --
------------ ------------ ------------
Net cash used by investing activities (12,484,039) (35,348,754) (19,778,792)
------------ ------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements

F-7
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
1998 1997 1996
---------------- ------------------ -----------------
Cash flows from financing activities:
<S> <C> <C> <C>
Net proceeds from borrowings $ 26,287,632 $ 9,772,600 $ 3,131,039

Repayment of notes payable (16,779,906) (2,624,214) (193,469)

Net proceeds from issuance of common stock 636,350 2,136,500 60,684,622

Proceeds from issuance of warrants 900,000 -- --

Net proceeds from issuance of convertible notes 13,959,649 24,841,239 9,175,000

Repurchase of warrants (1,679,956) -- --

Minority interest adjustment 17,749,979 -- --
------------ ------------ -----------
Net cash provided by financing activities 41,073,748 34,126,125 72,797,192
------------ ------------ -----------

Net Increase (Decrease) in cash and equivalents (1,032,943) (14,788,010) 18,072,864

Cash and equivalents at beginning of year 7,112,354 21,900,364 3,827,500
------------ ------------ -----------
Cash and equivalents at end of year $ 6,079,411 $ 7,112,354 $21,900,364
============ ============ ===========

Supplemental disclosures of cash flow
information:

Cash paid during the year for:

Interest $ 6,280,859 $ 1,065,796 $ 326,088
============ ============ ===========
Income Taxes $ 186,310 $ 8,000 $ 6,400
============ ============ ===========
</TABLE>

Supplemental disclosures of noncash investing and financing activities:

During the year ended February 29, 1996, the Company entered into financing
arrangements whereby it acquired assets for notes payable in the amount of
$1,678,343.

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 year ended February
28, 1997, the Company issued 748,860 shares in connection with the acquisitions
of MYS Corporation., Phillips Sound Labs and Revolver U.K. Limited valued at
$2,314,626.

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. During the
year ended February 28, 1997, $25,900,000 of convertible notes plus accrued
interest were converted into 12,815,368 shares of common stock.

During the year ended February 28, 1998, $4,544,778 of 8% convertible notes plus
accrued interest were converted into 3,164,001 shares of common stock. Effective
January 29, 1998, the Company executed a contract to purchase title and interest
to the "Aura" trademark name in several locations in Europe, Hong Kong and
Taiwan. Consideration included $200,000 worth of Aura common stock or 88,889
shares, and $1,587,678 of operating assets transferred to the seller of the
trademark name.

During the year ended February 28, 1998 the Company entered into financing
arrangements whereby it acquired assets for notes payable in the amount of
$493,781.

See accompanying notes to consolidated financial statements.

F-8
<PAGE>

AURA SYSTEMS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years ended February 28, 1998, February 28, 1997 and February 29, 1996

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

Business
--------

Aura Systems, Inc. ("Aura" or the "Company"), a Delaware corporation, is
engaged in the development, commercialization and sales of products,
systems and components using its patented and proprietary electromagnetic
and electro-optical technology, as well as the sale of other products which
do not utilize this technology, such as CD-ROMs, sound cards, multimedia
kits, modems, 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.

Prior to Fiscal 1992, the Company was engaged in work on various classified
military programs which allowed the Company to develop its electromagnetic
and electro-optical technologies and applications. Subsequently, the
Company transitioned from a supplier of defense technology to a
manufacturer and supplier of consumer and industrial related products and
services.

In 1994, the Company founded its subsidiary NewCom, Inc. ("NewCom"), which
is engaged in the manufacture, packaging, selling and distribution of
computer related communications and sound related products, including
modems, CD-ROMs, sound cards, speaker systems and multimedia products,
thereby expanding its presence in the growing multimedia, communication and
sound-related consumer electronics market. The Company acquired 100% of
the outstanding shares of MYS Corporation of Japan ("MYS") in 1996 to
expand the range of its sound products and speaker distribution network.
MYS is engaged in the manufacture and sale of speakers and speaker systems
for home, entertainment and computers.

In September 1997, NewCom completed an initial public offering. In the
offering 2,000,000 newly issued shares were sold to the public by NewCom
together with 300,000 shares of the Company's holdings, resulting in Aura
owning approximately 72.1% of NewCom at the conclusion of the offering.

In addition to the NewCom operations, the Company's other principal
operations are divided into three distinct operating divisions: (1)
Automotive and Industrial, which is manufacturing and commercializing
products with applications to both consumer and military, including the
AuraGen(TM) and EVA(TM); (2) Display Systems, which is commercializing
Aura's actuated mirror array technology ("AMA(TM)") in consumer and
commercial display systems for use in televisions, computer monitors and
theaters; and (3) AuraSound, Inc. ("AuraSound"), which manufactures and
sells professional and consumer sound systems and components and products,
including speakers, amplifiers, and Bass Shakers(TM).

The Company believes the principal competitive factors in the markets for
the Company's products include ability to develop and market
technologically advanced products to meet changing market conditions,
price, reliability, product support 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.

F-9
<PAGE>

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 a
significant competitors, particularly through their collaborative
arrangements with research and development companies.

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

The consolidated financial statements include accounts of the Company and
its wholly owned subsidiaries, MYS and its subsidiaries Audio-MYS, Mystical
Audio, MYS America and MYS U.S.A., Delphi Components, Inc., Phillips Sound
Labs, Inc., Aura Ceramics, Inc., Electrotec Productions, Inc. (and its
wholly owned subsidiary Electrotec Europe), and Auratech, Inc.
Additionally, the Company owned 70.1% of NewCom, Inc. and 61% of Aura
Medical Systems, Inc. ("AMS") at February 28, 1998, which are included in
the 1996, 1997, and 1998 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.

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.

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.

Goodwill
--------

Goodwill represents the excess purchase price over the fair market value of
the assets acquired of certain acquisitions. Goodwill is being amortized
over 40 years on a straight-line basis.

F-10
<PAGE>

The carrying value of goodwill is based on management's current assessment
of recoverability. Management evaluates recoverability using both
objective and subjective factors. Objective factors include management's
best estimates of projected future earnings and cash flows and analysis of
recent sales and earnings trends. Subjective factors include competitive
analysis and the Company's strategic focus.

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
---------------------

For the year ended February 28, 1998, the Company adopted Statement of
Financial Accounting Standard No. 128 ("SFAS 128") which requires the
presentation of Basic and Dilutive earnings per share, which replaces
primary and fully diluted earnings per share. Earnings per share have been
restated for all periods presented to reflect the adoption of SFAS 128.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Dilutive net income
per share is computed using the weighted average number of common shares
outstanding during the period, plus the dilutive effect of common stock
equivalents. Common stock equivalent shares consist of convertible
debentures, preferred stock, stock options and warrants. Diluted per share
information is not presented in the accompanying statements of operations
since the effect would be antidilutive.

Patents and Trademarks
----------------------

The Company capitalizes the costs of obtaining or acquiring patents and
trademarks. Amortization is provided for by the straight line method over
the shorter of the 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.

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 1998, 1997 and 1996 approximated $5.8 million, $4.5 million and
$7.0 million, respectively, including approximately $300,000, $700,000 and
$900,000 for the production of the advertising, which is continuing to be
used but has been expensed.

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 1998 and 1997, the Company capitalized costs of $16.1 million and
$16.5 million respectively, on special tools and equipment, which have been
designed for the manufacturing and development of actuators, speakers and
related products, automotive products, actuator mirror array wafers and
internet access and multimedia computer 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
$5.4 million, $3.2 million and $2.0 million for Fiscal 1998, 1997 and 1996,
respectively.

Product Return Risks
--------------------

The Company is exposed to the risk of product returns from its retailer
mass merchant and distributor customers as a result of several factors,
including returns from their customers, contractual stock rotation
privileges, returns of defective products or product components. In
addition, the Company generally accepts returns of unsold product from
customers with whom the Company has severed its customer relationship.
Overstocking by the Company's customers could lead to higher than normal
returns, which could have a material adverse effect on the Company's
results of operations. The Company also has a policy of offering price
protection to its customers for some or all of their inventory, whereby
when the Company reduces its prices for a product, the customer receives a
credit for the difference between the original purchase price of the
product and the Company's reduced price for the product. As a result of
this policy, significant reductions in price have had, and may in the
future have, a material adverse effect on the Company's results of
operations. In management's opinion, the financial statements include
adequate provisions to reserve for future product returns.

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

Certain reclassifications have been made to the 1997 financial statements
to conform with 1998 classifications. These reclassifications have no
effect on reported net loss amounts for 1997.

(2) Receivables
-----------

<TABLE>
<CAPTION>
Receivables consist of the following:
1998 1997
------------------ ------------------
<S> <C> <C>
Commercial receivables:

Amounts billed $59,277,378 $51,328,209

Recoverable costs and accrued profits not billed 931,056 5,844,610
----------- -----------
Total commercial receivables 60,208,434 57,172,819

Advances due from related parties 210,837 174,210
Less allowance for uncollectible receivables and sales (6,001,130) (3,603,331)
returns ----------- -----------
$54,418,141 $53,743,698
=========== ===========
</TABLE>

Bad debt expense was approximately $3.6 million, $738,000 and $3.5 million
in Fiscal 1998, 1997 and 1996 respectively.

(3) Sale of Minority Interest
-------------------------

In September 1997, a wholly owned subsidiary of the Company, NewCom, Inc.,
completed an Initial Public Offering in which 2,000,000 newly issued shares
were sold to the public along with 300,000 shares of the Company's
holdings. The Company subsequently sold an additional 200,000 shares
resulting in a reduction in the Company's ownership percentage to
approximately 70.2%, and a corresponding minority interest of 29.8% which
is reflected in the accompanying financial statements. As a result of these
transactions, the Company has reported a gain in the fiscal year of
approximately $4.8 million on the sale of 500,000 shares, and approximately
$7.4 million on the sale of newly issued shares.

F-12
<PAGE>

(4) Acquisitions
------------

(a) MYS Corporation
---------------

Effective the beginning of Fiscal 1997, the Company purchased 100% of the
stock of MYS Corporation and its subsidiaries Audio-MYS and Mystical
Audio (MYS). The purchase price was $2,000,000. The following summary,
prepared on a pro forma basis, presents the consolidated results of
operations as if MYS had been acquired as of the beginning of Fiscal
1996.

<TABLE>
<CAPTION>
<S> <C>
Net Revenues $ 97,615,008
Cost of Revenues 89,057,471
------------
Gross Profit 8,557,537
Expenses 33,720,949
------------
(Loss) from Operations (25,163,412)
Other (income) & Expenses 241,293
------------
Net (Loss) $(25,404,705)
Net (Loss) Per Share $ (0.47)
============
Weighted Average Number of Shares 54,500,527
============
</TABLE>

(b) Phillips Sound Labs
-------------------

In Fiscal 1996, the Company purchased 33.3% of Phillips Sound Labs, Inc.
(PSL). During Fiscal 1997 the remaining shares of PSL were acquired. The
total purchase price was $359,626.

In Fiscal 1997, the Company purchased 100.0% of Revolver U.K. Limited for
$1,150,396. In Fiscal 1998 the Company sold Revolver U.K. Limited in a
transaction whereby the Company acquired the Aura trademark in Europe and
Asia for its ownership of Revolver, $400,000 in cash and $200,000 worth
of Aura stock.

(f) Long Term Investments
---------------------

Long-term investments consist of the following:

Telemac Cellular Corp. $4,782,500 $4,655,000
Aquajet Corporation 883,834 853,834
Alaris Industries, Inc. 1,200,000 800,000
Foremost Audio 0 198,650
Others 609,965 27,014
---------- ----------
$7,476,299 $6,534,498
========== ==========
</TABLE>

In February 1998, the Company's subsidiary, NewCom, Inc. entered into an
Equipment Buy-Sell Agreement with Fourth Communications Network ("FCN")
whereby NewCom purchased 200,000 shares of FCN Series F Preferred Stock,
which is convertible into Common Stock at a conversion price of $25.00
per share, and received warrants to purchase 200,000 shares of Common
Stock at $15.00 per share, in consideration of a cash payment of
$5,000,000 of which $150,000 was paid in February 1998 with the balance
of $4,850,000 paid in March 1998. FCN, as part of the agreement, agreed
to purchase a fixed quantity of WebPal devices from the Company and
related support services for $2,500,000 in cash. FCN is a privately held
provider of communications systems to the hotel industry.

F-13
<PAGE>

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

(a) Malaysian Joint Venture
-----------------------

In 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., was established under Malaysian law to operate in Malaysia and 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 joint venture began shipping
products in 1995. In Fiscal 1998, the joint venture started producing
speakers for the MYS division.

(b) Dewan-Aura Joint Venture
-------------------------

In 1995, the Company entered into an agreement with K&K Enterprises of
India ("K&K") for the formation of a joint venture to manufacture and
sell speakers using Aura's proprietary technology. K&K acquired a license
to the Company's technology and granted an exclusive sub-license to the
joint venture. The joint venture ("Dewan-Aura") 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. As consideration for the license,
the Company would receive a $1,000,000 fee, $400,000 of which was
received in Fiscal 1996. The joint venture began shipping product in late
1995.

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

Without any changes to its terms, the two joint ventures were merged in
Fiscal 1996 into one joint venture encompassing both. The new venture was
renamed Dewan-Aura. Due to continued quality problems in production, and
the availability of lower cost high quality components in other Asian
countries the parties decided to terminate the license agreement in the
second half of Fiscal 1998. The Company has moved the manufacturing of
these products to Malaysia, the Phillipines and Mexico, where the Company
has already been manufacturing these products in the last year. As a
result, the Company has taken a charge of approximately $2.7 million in
Fiscal 1998.

In 1994, the Company formed Auratech, Inc. as a joint venture to develop,
design, manufacture and market machine tooling robotics and industrial
hand tool applications of the Company's electromagnetics technology. In
June, 1995, Auratech entered into a license agreement with Detroit Center
Tool ("DCT"). DCT is engaged in business relating to the design and
integration of robotics in automobile assembly lines. Under the license,
DCT was entitled to manufacture the Company's patented and proprietary
electromagnetic actuator for an actuated tool used in such assembly
lines. In late 1995, the Company purchased the 50.1% of Auratech owned by
its joint venture partner. In Fiscal 1998, due to a business shift in
DCT, including spinning-off some of its operations, Auratech and DCT
terminated the license which resulted in a charge of approximately $2.3
million in Fiscal 1998. The Company now owns 100% of Auratech and
operates it as a wholly owned subsidiary. Auratech is pursuing machine
tooling robotics and industrial hand tool applications with a third
party.

F-14
<PAGE>

(d) Daewoo Agreement
----------------

In 1992, the Company entered into a joint development and licensing
agreement with Daewoo Electronics Co., Ltd. ("Daewoo") to develop and
commercialize televisions using Aura's AMA display technology. 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/TM/ will be identified on
the product by an Aura trademark ("Aurascope"). Royalty payments will be
on a scheduled basis upon commencement of commercial production.

Daewoo, who is solely responsible for manufacturing and sales under the
license agreement, has advised the Company that it may be able to begin
commercial production of large screen display televisions under the
license agreement in 1998. There are no assurances as to when or if
Daewoo will commence commercial production of televisions incorporating
Aura's AMA/TM/ display technology. The ultimate degree of success, if
any, of this venture is dependent on Daewoo.

(e) Aura K&K License Agreement
--------------------------

In February 1997, the Company entered into a license agreement with K&K
Enterprises in India to commercialize the AuraGen in the Indian, Nepal,
Sri Lanka and Bangladesh markets. The agreement called for a license fee
of $3,500,000 to be paid in payments over a 24 month period starting in
June 1997, a fixed per unit royalty for every unit built and shipped in
the licensed territory after December 1998. Furthermore, all units were
to be identified on the product by an Aura trademark ("AuraGen"). Due to
the delays associated with commencement of production of the AuraGen
there was initially a delay in the license payments. However, subsequent
to the end of Fiscal 1998 the Company received the first license payment
of $300,000. Royalty payments per unit were to be on a scheduled basis
every quarter after December 1, 1998. The Company expected that payments
of the remaining portion of the license would be proportionally delayed
due to a late start.

On May 11, 1998, India conducted a series of nuclear tests and on May 13,
1998 the President of the United States imposed a range of economic
sanctions upon India pursuant to the Arms Export Control Act. These
sanctions and the current climate generally has affected the Company's
ability to request and obtain necessary United States Department of State
and Commerce export approvals and licenses. New and pending export
licensing requests with respect to dual-use products and transfers of
high technology are currently either being placed on hold or denied.

AuraGen is a high technology product which has application in military
vehicles, where unique portable power generation may also power missile
launching devices as well as telecommunication/radar and other devices.
No assurances can be given that the government will now permit sales of
the AuraGen to the Indian military, allow a technology transfer of this
sort to an Indian private company, or that, given the status of
sanctions, K&K will honor its payment obligations under the license
agreement.

Therefore, in view of these uncertainties the Company has notified K&K
Enterprises in India that Aura must temporarily suspend the license. The
license fee receivable of $3,114,030 has been written off in Fiscal 1998
due to the uncertainty of recovery of this asset.

(6) Related Party Transactions
--------------------------

Notes and advances due from related parties, aggregated $210,837 and
$174,210 at February 28, 1998 and February 28, 1997, respectively,
included in current receivables and $19,000 and $19,000 included in non-
current receivables at February 28, 1998 and February 28, 1997,
respectively.

Alexander Remington, a director of the Company's subsidiary NewCom, Inc.,
founded and currently serves as Chief Executive Officer of Micro
Equipment Corporation ("M.E.C.") and is the controlling shareholder of

F-15
<PAGE>

C'More, Inc. M.E.C. purchased certain product from NewCom in the
aggregate amount of approximately $3.72 million and $0 in Fiscal 1998 and
1997, respectively. C'More, Inc. purchased certain products from NewCom
in the aggregate amount of approximately $0 and $3.65 million in Fiscal
1998 and 1997, respectively. The stated terms of the purchases were
payment 30 days from the date of shipment.

In addition, M.E.C. served as a supplier of products and components to
NewCom in the amount of approximately $6.3 million and $12.5 million in
Fiscal 1998 and 1997, respectively. NewCom may continue to purchase
products and components from M.E.C. in the future, generally consisting
of those products and components included in NewCom's communication and
multimedia products currently offered and under development, although
NewCom is unable to specifically identify the products or components or
amounts thereof that may be so purchased. Purchases from M.E.C. will only
be made if they are approved by a majority of NewCom's disinterested
directors, are on terms no less favorable to NewCom than could be
obtained from unaffiliated parties and are reasonably expected to benefit
NewCom.

James M. Curran, a director of NewCom, has served as a business sales
consultant to Aura since March 1997. For his services, Mr. Curran has
received $237,700 from Aura through February 28, 1998.

Richard A. Rappaport, a Director of NewCom, served as Managing Director
of Investment Banking of Joseph Charles & Associates, Inc. ("Joseph
Charles") from 1995 to April, 1998. In September 1997, Joseph Charles
served as lead underwriter of NewCom's initial public offering. In
connection with the offering, Joseph Charles received $1,529,500 in the
form of underwriting discounts and commissions and $546,250 in the form
of a non-accountable expense allowance. In addition, Joseph Charles
received an option to purchase 230,000 Units (one common share and one
warrant to purchase a common share) at a price of $13.78 per Unit,
exercisable over a period of four years commencing September 15, 1998.

As part of the underwriting agreement, NewCom has agreed to retain Joseph
Charles as a financial consultant for a period of two years from the date
of the offering at a fee of $3,000 per month. For the fiscal year ended
February 28, 1998, Joseph Charles has earned $18,000 for these services.
In addition, NewCom has paid Joseph Charles an additional $36,500 for
other investment banking services.

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

Inventories, net of reserve for potential product obsolescence of $4.5
million in 1998 and $2.3 million in 1997, consist of the following:

<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
<S> <C> <C>
Raw materials $14,667,024 $15,516,034
Finished goods 44,046,851 18,331,262
----------- -----------
$58,713,875 $33,847,296
=========== ===========
</TABLE>

Inventories at February 28, 1998 include approximately $5.0 million that
was received subsequent to year end, but was shipped F.O.B. shipping
point, requiring the Company to include this amount in its reported
inventory and to record the corresponding liability in accounts payable.

(8) Property and Equipment
----------------------

Property and Equipment, at cost is comprised as follows: 1998 1997
----------- -----------
<S> <C> <C>
Land $ 3,870,361 $ 3,952,425
Buildings 9,366,512 8,841,082
Machinery and equipment 48,610,238 34,390,262
Furniture, fixtures and leasehold
improvements 4,820,560 5,683,474
----------- -----------
$66,667,671 $52,867,243
=========== ===========
</TABLE>

F-16
<PAGE>

(9) Deferred Charges
----------------

Deferred charges, included in other assets, consists of expenses
incurred by the Company in the pre-production phase of its products.
Amortization of these charges commences upon initial production over a
period of 24 months. Amortization expense related to the deferred charges
totaled $171,027 in Fiscal 1998, $1.1 million in Fiscal 1997, and
$1.6 million in Fiscal 1996.

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

Included in Notes Payable and Other Liabilities are Notes Payable which
consist of the following:

<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Lines of Credit $ 9,569,235 $ 9,470,656
Notes payable-equipment (a) 2,870,971 7,935,272
Notes payable-buildings (b) 3,553,187 1,491,703
Unsecured notes payable (c) 17,975,000
---------------- -----------------
33,968,393 18,897,631
Less: current portion 31,147,572 14,859,567
---------------- -----------------
Long term portion 2,820,821 4,038,064
Reserve for environmental cleanup 461,182 420,586
----------- -----------
$3,282,003 $ 4,458,650
=========== ===========
</TABLE>

(a) Notes payable-equipment consists of various notes maturing at various
dates thru September 2000 bearing interest at various rates and are
collaterized by equipment.

(b) Notes payable-buildings consists of a 1st Trust Deed held by the seller
of a building in California, due in Fiscal 2007, and a note due October
2000 collateralized by a building in Malaysia.

Annual maturities of long term notes payable for the next five fiscal
years are as follows:

<TABLE>
<CAPTION>
Fiscal Year Amount
-------------------- -----------
<S> <C>

1999 $31,147,572
2000 945,313
2001 301,192
2002 218,087
2003 214,680
</TABLE>

The Company's subsidiary NewCom has a financing arrangement with a lender
who is providing a line of credit collateralized by NewCom's accounts
receivable. At February 28, 1998 the balance was approximately $6.6
million with a maximum of $9.0 million. The interest rate at February 28,
1998 was 9.75%. Subsequent to year end the maximum amount on the line was
increased to $12.0 million.

In addition, the Company has $800,000 of available but unused lines of
credit from a financial institution in Japan with an interest rate of 3%.

F-17
<PAGE>

(11) Notes Payable
-------------

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. The
notes are redeemable by the noteholder or the Company commencing in July
1997.

In Fiscal 1996, the Company issued $1,250,000 of unsecured 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 Convertible
Notes due February 2, 1998. The Notes plus accrued interest of $123,693
were converted into 2,745,444 shares of common stock in Fiscal 1997.

In Fiscal 1997, the Company issued $26,350,000 of unsecured Convertible
Notes due at various dates, $17,900,000 of these notes plus accrued
interest of $228,534 were converted into 10,069,924 shares of common
stock in Fiscal 1997.

In Fiscal 1998, the Company issued $34,500,000 of unsecured notes
payable to investors. During the fiscal year the Company redeemed
$3,800,000 of notes issued in Fiscal 1997 and $2,000,000 of notes issued
in Fiscal 1998. Additionally, $4,500,000 of notes issued in Fiscal 1997
were converted into 3,164,001 shares of common stock.

(12) Accrued Expenses
----------------
Accrued expenses consist of the following:

<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Accrued payroll and related expenses $1,092,082 $1,053,294
other 2,897,945 850,150
---------- ----------
$3,990,027 $1,903,444
========== ==========
</TABLE>

(13) Income Taxes
------------

At February 28, 1998, the Company had net operating loss carryforwards
for Federal and state income tax purposes of approximately $70 million
and $20 million respectively, which expire through 2013.

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 million for
Fiscal 1998 and $26 million for Fiscal 1997. The Company has also
recorded a valuation account to fully offset the deferred benefit due to
the uncertainty of the realization of this benefit, except for a total of
$940,000 (of which $838,000 is a current asset) of deferred benefit
related to the Company's NewCom, Inc. subsidiary.

As of September 19, 1997, NewCom, Inc. is no longer included in the
Company's consolidated Federal tax return since the Company's ownership
percentage was reduced below 80% as of that date.

In connection with the deconsolidation of NewCom, Inc. for Federal income
tax reporting purposes, the Company recognized an income tax benefit of
approximately $1.3 million for financial reporting purposes in the
accompanying statement of operations for Fiscal 1998.

F-18

<PAGE>

The Company's Japanese subsidiary, MYS Corporation, pays income taxes to
the Japanese government at an effective rate of approximately fifty eight
percent. At February 28, 1998 and February 28, 1997, MYS Corporation had a
current income tax liability of approximately $176,000 and $520,000,
respectively.

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

The Company has 200,000,000 shares of $.005 par value common stock
authorized for issuance.

Remaining warrants outstanding to purchase Common Stock are 12,454,195 at
an average price of $3.137.

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 Exercise Price
------ --------------
<S> <C> <C>
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

Grants -- --
Cancellations -- --
Exercises -- --
--------- ----------
Options outstanding at February 28, 1997 1,009,578 $1.44-5.50
========= ==========
</TABLE>

The following table summarizes information about director stock options at
February 28, 1998:

<TABLE>
<CAPTION>
Number Weighted Number
Range of Outstanding at Average Average Exercise Exercisable As
Exercise Price 2/28/98 Remaining Life Price of 2/28/98 Exercise Price
-------------- ------- -------------- ----- ---------- --------------
<S> <C> <C> <C> <C> <C>
$1.50 38,000 0.60 $1.50 38,000 $1.50
$2.30 50,000 9.13 $2.30 50,000 $2.30
$2.06 400,000 9.36 $2.06 400,000 $2.06
$3.06 70,000 1.33 $3.00 70,000 $3.06
$4.00 461,578 0.75 $4.00 461,578 $4.00
$4.75 40,000 1.09 $4.75 40,000 $4.75
</TABLE>

F-19
<PAGE>

(15) 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 made no contributions
to the ESOP in Fiscal 1998, 1997 and 1996 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.

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measure compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, the standard
permits entities to continue accounting for employee stock option and
similar equity instruments under APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro forma disclosures of net
income and earnings per share, as if the fair value-based method of
accounting defined is SFAS No. 123 had been applied. Management accounts
for options under APB Opinion No. 25. If the alternative accounting-
related provisions of SFAS No. 123 had been adopted as of the beginning of
1995, any effect on 1998, 1997 and 1996 net loss and loss per share would
not have changed.

A summary of activity in the employee stock option plan is as follows:

<TABLE>
<CAPTION>
Shares Exercise Price
------ --------------
<S> <C> <C>
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
---------- ----------

Grants -- --
Cancellations -- --
Exercises (10,000) 3.50
----------- ---------

Options outstanding at February 28, 1997 3,879,800 1.44-7.31
--------- ----------

Grants 2,983,000 1.79-2.15
Cancellation (3,002,800) 1.44-3.06
Exercises (25,000) 2.06
---------- ----------

Options outstanding at February 28, 1998 3,835,000 $1.44-7.31
========== ==========
</TABLE>

F-20
<PAGE>

The following table summarizes information about employee stock options at
February 28, 1998:

<TABLE>
<S> <C> <C> <C> <C> <C>
Number Weighted Number
Range of Outstanding at Average Average Exercise Exercisable As
Exercise Price 2/28/98 Remaining Life Price of 2/28/98 Exercise Price
-------------- ------- -------------- ----- ---------- --------------

$3.06-$4.12 135,000 1.44 3.26 135,000 $3.06-$4.12
$1.44 445,000 2.92 1.44 445,000 $1.44
$7.25 9,000 3.75 7.25 9,000 $7.25
$3.00-$4.00 215,000 4.62 2.81 215,000 $3.00-$4.00
$3.50-$7.31 73,000 5.60 5.70 58,400 $3.50-$7.31
$1.79-$2.15 2,958,000 9.42 2.02 2,608,000 $2.06
</TABLE>

Equity Transactions-NewCom
- --------------------------

(a) Sale of Common Stock
--------------------

On September 15, 1997, the Company's subsidiary, Newcom, completed an
initial public offering of common stock. This offering consisted of
2,000,000 newly isssued units and 300,000 shares sold by the Company.
Each unit consisted of one share of Common Stock and one Common Stock
Purchase Warrant. An aggregate of 2,000,000 units were issued by NewCom
at a price of $9.50 per unit that resulted in net proceeds to NewCom
after expenses of the offering, of approximately $16,100,000.

(b) Employee Stock Options
----------------------

NewCom has a 1997 incentive stock option plan under which 1,000,000
shares of common stock of NewCom were reserved for grants made or to be
made. Under the 1997 Stock Option Plan, the options granted generally
vest over five years at a rate of 20% on each anniversary of the date
of grant. Options granted to the named Executive officers vest over a
period of four years at a rate of 25% on each anniversary of the date
of grant. The Plan provides that incentive stock options be granted at
fair market value of the common stock on the date of the grant. All
other options granted under the Plan must be at least 85% of the fair
market value of the common stock on the date of the grant. All options
granted are adjusted for stock splits and stock dividends. No options
are exercisable for periods of more than 10 years after grant. The per
share weighted average fair value granted during 1998 was $9.60. The
fair value of each employee option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used: risk free rate of interest of 5.74%; dividend yield
of 0%; and expected lives of 5 years.

No options were granted prior to Fiscal 1998.

NewCom applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had NewCom determined compensation
cost based on the fair value at the grant date for its stock options
under SFAS No. 123, NewCom's net income for Fiscal 1998 would not have
been changed.

The changes in NewCom's outstanding employee stock options for the year
ended February 28, 1998 is as follows:

<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding at February 28, 1997 0 0

Granted 569,655 8.23
Exercised 0 0
Forfeited 0 0
-------- --------

Outstanding at February 28, 1998 569,655 $ 8.23
======== =======
</TABLE>

F-21
<PAGE>

The following table summarizes information about NewCom's employee stock options
at February 28, 1998:

<TABLE>
<CAPTION>
Number Weighted Number
Range of Outstanding at Average Average Exercise Exercisable As
--------
Exercise Price 2/28/98 Remaining Life Price of 2/28/98 Exercise Price
-------------- ------- -------------- ----- ---------- --------------
<S> <C> <C> <C> <C> <C>
$7.98 548,375 9.25 $ 7.98 0 0
$14.75 21,280 9.75 $14.75 21,280 $14.75
------- ---------
$7.98 - $14.75 569,655 9.27 $ 8.23 21,280 $14.75
======= =========
</TABLE>

As of February 28, 1998, there were 2,000,000 NewCom warrants
outstanding to purchase 2,000,000 shares of NewCom common stock. These
warrants were issued as part of the public offering unit in September,
1997 and were immediately detachable at that time. Each warrant
entitles the holder to purchase one share of NewCom common stock at
$14.25 from September 15, 1997 through September 15, 2002. The warrants
are redeemable at the option of NewCom for $0.05 per warrant at any
time on or after September 15, 1998 or at such earlier date upon 30
days prior notice, if the closing price of the common stock equals or
exceeds $18.80 per share for 20 consecutive trading days.

In connection with NewCom's initial public offering in September, 1997,
NewCom granted the underwriter 200,000 units which are convertible into
200,000 shares of common stock and 200,000 warrants to purchase 200,000
shares of NewCom's common stock. The unit is exercisable at $13.78 per
unit commencing September 15, 1998 and expires September 15, 2002. The
warrant received in connection with the unit exercise is convertible
into one share of common stock for $14.25 and is exercisable until
September 15, 2002.

(16) Leases
------

The Company leases office facilities and equipment under operating
leases that expire through Fiscal 2002. Other costs, such as property
taxes, insurances and maintenance, are also paid by the Company. Rental
expense charged to operations approximated $1.3 million, $1.3 million
and $900,000 in Fiscal 1998, 1997 and 1996, respectively.

At February 28, 1998, minimum rentals under noncancellable operating leases are
as follows:
<TABLE>
<CAPTION>
Fiscal year:
Gross Rents Sublease Net Rents
----------- -------- ---------
<S> <C> <C> <C>
1999 $1,207,333 $26,182 $1,181,151
2000 1,030,647 -- 1,030,647
2001 750,128 -- 750,128
2002 473,180 -- 473,180
2003 473,180 -- 473,180
2004-2007 1,196,470 -- 1,196,470
---------- ------- ----------
$5,130,938 $26,182 $5,104,756
========== ======= ==========
</TABLE>

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

The Company sold sound related products and computer related products
to five significant customers during Fiscal 1998. Sales of speakers to
a major electronics retailer accounted for approximately $11.8 million
or 7.3% of gross revenues. Sales of communications and multimedia
products to major mass merchandisers Best Buy, Circuit City, and
Staples accounted for $60.1 million or 37.3% of gross revenues. Sales
of computer monitors to two customers accounted for approximately $10
million or 6.2% of gross revenues.

F-22
<PAGE>

(18) Purchase Commitment
-------------------

The Companies subsidiary, NewCom entered into a Subcontract with a supplier
in January 1998 which calls for the supplier to provide the Company with
specified quantities of modems and certain multimedia components for a
total contract price of $28,325,000, of which $3,580,000 was paid as a
deposit by the company in Fiscal 1998.

(19) Contingencies
-------------

The Company is engaged in various legal actions listed below.

Barovich/Chiau v. Aura
----------------------

In May, 1995 two lawsuits naming Aura, certain of its directors and
executive officers and a former officer as defendants, were filed in the
United States District Court for the Central District of California,
Barovich v. Aura Systems, Inc. et al. (Case No. CV 95-3295) and Chiau v.
------------------------------------ -------
Aura Systems, Inc. et al. (Case No. CV 95-3296), before the Honorable
------------------------
Manuel Real. The complaints purported to be securities 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 Complaints
alleged 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. The complaints were consolidated as
Barovich v. Aura Systems, Inc., et. al.
--------------------------------------

On February 16, 1996, the Company filed a motion for summary judgment which
was granted on April 15, 1996. Judgment in favor of the Company and all
defendants was entered on April 16, 1996. The Plaintiffs filed an appeal in
the United States Court of Appeals for the Ninth Circuit and on January 9,
1998, the Ninth Circuit issued a memorandum decision reversing the judgment
and remanding the case back to the District Court. On remand, the District
Court set a new summary judgment hearing date for April 13, 1998. The
Company filed a renewed motion for summary judgement on March 20, 1998, and
soon thereafter the parties entered into a letter agreement of settlement,
in which Aura agreed to pay $1 million to settle the case. Aura's insurance
carrier agreed to pay an additional $2 million towards the settlement. The
insurance carrier reserved its right to seek recovery from Aura for the $2
million paid for Aura's account. The insurance carrier's claim will be
determined in a separate proceeding filed by the carrier in the same court
(Evanston Insurance Co. v. Aura Systems, Inc. et. al. (Case No. CV-98-
---------------------------------------------------
0908)) alleging that the Barovich claims are not covered by the insurance
--------
policy. Aura has filed an answer with the court denying these allegations.
A provision of $1 million for the Company's portion of the Barovich case
--------
has been recorded in Fiscal 1998. The formal settlement papers are
currently being negotiated.

Morganstein v. Aura.
--------------------

On April 28, 1997, a lawsuit naming Aura, certain of its directors and
officers, and the Company's independent accounting firm was filed in the
United States District Court for the Central District of California
Morganstein v. Aura Systems, Inc., et al. (Case No. CV 97-3103), before the
----------------------------------------
Honorable Steven Wilson. A follow-on complaint, Ratner v. Aura Systems,
-----------------------
Inc., et al. (Case No. CV 97-3944), was also filed and later consolidated
-----------
with the Morganstein complaint. The consolidated amended complaint
-----------
purports to be a securities class action on behalf of all persons who
purchased common stock of Aura during the period from January 18, 1995 to
April 25, 1997, inclusive. The complaint alleges 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.
The complaint contains allegations which assert that the company violated
federal securities laws by selling Aura Common stock at discounts to the
prevailing U.S. market price under Regulation S without informing Aura's
shareholders or the public at large.

F-23
<PAGE>

the Court granted, setting July 13, 1998 as the date for plaintiffs to file
a judgment hearing for August 10, 1998. On April 28, 1998, the District
Court certified the case as a class action, with the class including all
persons who purchased common stock of Aura from January 18, 1995 to April
25, 1997, inclusive. The parties are currently engaged in discovery.

Securities and Exchange Commission Settlement.
----------------------------------------------

In October, 1996, the Securities and Exchange Commission ("Commission")
issued an order (Securities Act Release No. 7352) instituting an
administrative proceeding against Aura Systems, Zvi Kurtzman, and an Aura
former officer. The proceeding was settled on consent of all the parties,
without admitting or denying any of the Commission's findings. In its
order, the Commission found that Aura and the others violated the
reporting, recordkeeping and anti-fraud provisions of the securities laws
in 1993 and 1994 in connection with its reporting on two transactions in
reports previously filed with the Commission. The Commission's order
directs that each party cease and desist from committing or causing any
future violation of these provisions.

The Commission did not require Aura to restate any of the previously issued
financial statements or otherwise amend any of its prior reports filed with
the Commission. Also, the Commission did not seek any monetary penalties
from Aura, Mr. Kurtzman or anyone else. Neither Mr. Kurtzman nor anyone
else personally benefited in any way from these events. For a more complete
description of the Commission's Order, see the Commission's release
referred to above.

Other Litigation.
-----------------

The Company is also engaged in other legal actions. In the opinion of
management, based upon the advice of counsel, the ultimate resolution of
these matters will not have a material adverse effect. Therefore, no
provision has been made in the Company's consolidated financial statements,
except that two such matters were settled subsequent to year end, and a
provision of $700,000 has been recorded in Fiscal 1998.

(20) Concentrations of Credit Risk
-----------------------------

Financial instruments that subject the Company to concentration of credit
risk are cash equivalents, trade receivables, notes receivable, trade
payables and notes payable. The carrying value of these financial
instruments approximate their fair value at February 28, 1998. Cash
equivalents consist principally of short-term money market funds, these
instruments are short term in nature and bear minimal risk.

The Company performs credit background checks and evaluates the credit
worthiness of all potential new customers prior to granting credit. UCC
financing statements are filed, when deemed necessary.

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

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This statement which is effective for fiscal years beginning after December
15, 1997 requires the Company to make certain disclosures but has no impact
on the Company's financial statements.

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

Certain fourth quarter adjustments were made in Fiscal 1998 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.

F-24
<PAGE>

<TABLE>
<CAPTION>
Millions
<S> <C>
a. Seasonal expenses during the fourth quarter $ 0.9
b. Incremental increase in fourth quarter interest expense 1.2
c. Incremental increase in fourth quarter legal expenses 0.5
d. Consolidate and relocate warehouse facilities to Kansas City 0.8
e. Reserve on AuraGen License in India due to US sanctions 3.1
f. Loss on foreign joint ventures 1.9
g. Legal settlements 1.7
-----
TOTAL $10.1
=====
</TABLE>

During the fourth quarter the Company attended two major tradeshows. The
CES show in January and the SAE show in February. Both of these had a bias
effect on expenses for the fourth quarter by approximately $0.9 million.
During the fourth quarter the Company experienced an incremental increase
in interest of approximately $1.2 million due to the conversion of a $15
million convertible note to a straight note in September and additional
interest incurred on a $10 million financing that occurred in October.
Legal expenses increased above other periods in the fourth quarter as legal
activities increased in numerous areas. After a careful analysis and
review of expenses the Company consolidated and relocated its main
warehouse facilities from San Diego, California to Kansas City, Missouri.
The cost of approximately $0.8 million associated with this consolidation
will be saved in approximately one year. Due to uncertainties created by
India's detonation of nuclear devices and U.S. sanctions against India the
Company reserved $3.1 million in license fee due from K&K in India for the
AuraGen. The Company also incurred losses from foreign non-consolidated
Joint Ventures of approximately $1.9 million. After year-end the Company
settled one class action suit and other litigation, and took a charge of
$1.7 million in Fiscal 1998.

(23) Subsequent Events
-----------------

(a) On March 1, 1998, the disinterested members of the Board of Directors
determined unanimously to provide eleven Company Executives with a
combination of compensation, benefits and severance arrangements to secure
executive services. The contract terms are for a period of three years;
provided, that on the first anniversary of the effective date of each
agreement, and on each succeeding anniversary of the effective date of
term, the term of each agreement will automatically be extended by an
additional year.

Base salaries were retroactive to December 19, 1997, effective on March 5,
1998, and are subject to increase as recommended by the Compensation
Committee and approved by a majority of disinterested members of the Board
of Directors. The base salaries will be adjusted on or prior to each
anniversary of the effective date. Executives will have the opportunity to
earn a target bonus of up to 50% of their base salary based on the
attainment of certain criteria determined by a majority of disinterested
members of the Board of Directors, which criteria may be different for each
Executive. Compensation arrangements includes the issuance of stock options
subject to the approval of a majority of the disinterested members of the
Board of Directors.

(b) On March 30, 1998, the Company sold $8 million of Convertible Debentures to
a single institutional investor for cash. The Debentures bear interest at
the rate of 7% per annum, with the entire principal amount due and payable
on March 30, 2003, subject to prior redemption or conversion. The
Debentures are convertible, at the option of the holder, into Common Stock
at a fixed conversion price of $3.13 per share. As part of the financing,
the investor received warrants to purchase up to 2,415,094 shares
exercisable at $3.64 per share.

(c) In May 1998 the Company completed a refinancing of two properties owned by
Aura in El Segundo, consisting of its headquarters and an adjacent
facility. As part of the financing the Company encumbered these properties
with a first deed of trust securing a Note in the amount of $5,450,000,
resulting in net cash to the Company of approximately $3.0 million.

(d) On June 3, 1998, the Company entered into an agreement with one of the
investors to reduce the exercise price of 1,009,009 Warrants from $3.81 to
$2.50 and to fully exercise the Warrants. The Company further agreed that
if the average bid price for the five trading days ending on December 15,
1998 is less than $2.50, the Company would further reduce the exercise
price retroactively by issuing to the investor additional shares to reflect
the difference between the current exercise price and the market price in
December 1998, In addition, the Company issued to the investor two new
Warrants: a five year Warrant exercisable for 1,009,009 shares of Common
Stock at an exercise price equal to the lesser of $2.52 and the average
closing bid price over the 15 trading days beginning June 15, 1998: a five
year warrant exercisable for 756,757 shares of Common Stock at an exercise
price of $3.50.

F-25
<PAGE>

SCHEDULE II
AURA SYSTEMS, INC.
AND SUBSIDIARIES

Valuation and Qualifying Accounts

Years ended February 28, 1998, February 28, 1997 and February 29, 1996

<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
beginning of costs and other end
period expenses Accounts Deductions of period
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowances are deducted from the
assets to which they apply

Year ended February 28, 1998:

Allowance for:
Uncollectible Accounts $ 2,090,652 $ 3,617,056 $ -- $ 276,183 $ 5,431,525
Reserve for returns 1,512,679 23,504,148 -- 24,447,222 569,605
Reserve for potential product
obsolescence 2,255,000 4,030,000 -- 1,750,000 4,535,000
----------- ----------- ---------- ------------ -----------
$ 5,858,331 $31,151,204 $ -- $ 26,473,405 $10,536,130
=========== =========== ========== ============ ===========

Year ended February 28, 1997:

Allowance for:
Uncollectible Accounts $ 1,947,883 $ 737,577 $ -- $ 594,808 $ 2,090,652
Reserve for returns 535,119 977,560 -- -- 1,512,679
Reserve for potential product
obsolescence -- 2,255,000 -- -- 2,255,000
----------- ----------- ---------- ------------ -----------
$ 2,483,002 $ 3,970,137 $ -- $ 594,808 $ 5,858,331
=========== =========== ========== ============ ===========

Year ended February 29, 1996:

Allowance for:
Uncollectible Accounts $ 1,192,500 $ 3,496,381 $ -- $ 2,740,998 $ 1,947,883
Reserve for returns 387,749 535,119 -- 387,749 535,119
----------- ----------- ---------- ------------ -----------
$ 1,580,249 $ 4,031,500 $ -- $ 3,128,747 $ 2,483,002
=========== =========== ========== ============ ===========
</TABLE>

F-26

<PAGE>

EXHIBIT 21.1

Aura Systems, Inc. and Subsidiaries
-----------------------------------

Aura Systems, Inc.
Aura Ceramics, Inc.
Aura Designs, Ltd.
Aura Medical Systems, Inc.
Aura Realty, Inc.
AuraSound, Inc.
AuraTech, Inc.
Audio-MYS Corporation
Dreamworks Holdings, Ltd.
Electrotec, Inc.
Electrotec-AudioLease, Ltd.
Linaeum Corporation
MYS America, Inc.
MYS Corporation
Mystical Audio, Inc.
MYS USA, Inc.
NewCom,. Inc.
Phillips Sound Labs, Inc.

<PAGE>

EXHIBIT 23.1

CONSENT OF PANNELL KERR FORSTER
-------------------------------

We hereby consent to the incorporation by reference in the Registration
Statements of Aura Systems, Inc. on Form S-3 (File Nos. 333-1315, 33-75160, 333-
41509 and 333-46773) and Form S-8 (File No. 33-66982) of our report dated June
10, 1998, on our audits of the financial statements of Aura Systems, Inc. as of
February 28, 1998, February 28, 1997, and February 29, 1996, and for each of the
three years then ended, which report appears in the Form 10-K of Aura Systems,
Inc. for the fiscal year ended February 28, 1998.

PANNELL KERR FORSTER
Los Angeles, California
June 10, 1998

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 6,079,411
<SECURITIES> 0
<RECEIVABLES> 54,418,141
<ALLOWANCES> 0
<INVENTORY> 58,713,875
<CURRENT-ASSETS> 139,301,858
<PP&E> 66,667,671
<DEPRECIATION> (11,888,586)
<TOTAL-ASSETS> 227,302,629
<CURRENT-LIABILITIES> 79,132,963
<BONDS> 0
0
0
<COMMON> 199,100,614
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 227,302,629
<SALES> 161,040,266
<TOTAL-REVENUES> 161,040,266
<CGS> 101,622,051
<TOTAL-COSTS> 148,035,277
<OTHER-EXPENSES> (5,478,960)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,051,654
<INCOME-PRETAX> 0
<INCOME-TAX> (1,256,046)
<INCOME-CONTINUING> (1,256,046)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,636,540)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0

</TABLE>