AURA SYSTEMS INC - Quarter Report: 2006 May (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ___________________ May 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

AURA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

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

2330 Utah Avenue.

El Segundo, California 90245

(Address of principal executive offices)

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

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

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

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

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated filer x

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

Yes ¨ No x

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes x No ¨

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

Class		Outstanding June 30, 2006
Common Stock, par value $0.0001 per share		24,282,710 shares

AURA SYSTEMS, INC. AND SUBSIDIARIES

INDEX

Index			Page No.

PART I.	FINANCIAL INFORMATION

	ITEM 1.	Financial Statements

		Statement Regarding Financial Information

		Condensed Consolidated Balance Sheets as of May 31, 2006 (Unaudited) and February 28, 2006	4

		Condensed Consolidated Statements of Operations for the Three Months Ended May 31, 2006 (Unaudited) and 2005 (Unaudited)	5

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2006 (Unaudited) and 2005 (Unaudited)	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	7

	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	19

	ITEM 4.	Controls and Procedures	19

PART II.	OTHER INFORMATION

	ITEM 2.	Changes in Securities	20

	ITEM 6.	Exhibits and Reports on Form 8-K	20

	SIGNATURES AND CERTIFICATIONS		21

AURA SYSTEMS, INC. AND SUBSIDIARIES

QUARTER ENDED MAY 31, 2006

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The consolidated financial statements included herein have been prepared by Aura Systems, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). As contemplated by the SEC under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by accounting principles generally accepted in the United States of America. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended February 28, 2006 as filed with the SEC (file number 000-17249).

AURA SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	May 31, 2006			February 28, 2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,708,003		$	472,482
Receivables, net		61,432			87,808
Current inventories		818,792			615,000
Other receivables		-			2,654,864
Other current assets		50,942			69,690

Total current assets		2,639,169			3,894,844

Property and equipment, at cost		2,263,518			2,420,800
Less: accumulated depreciation and amortization		2,221,661			2,394,131

Net property and equipment		41,857			26,669

Non-current inventories		3,666,134			3,964,864

Total assets	$	6,347,160		$	7,891,377

Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable	$	100,483		$	590,577
Notes payable - current portion		246,692			48,766
Accrued expenses		496,114			528,192
Deferred income		164,625			164,625

Total current liabilities		1,007,914			1,332,160

Notes payable, net of current portion		2,338,224			2,476,234

Total Liabilities		3,346,138			3,808,394
COMMITMENTS AND CONTINGENCIES
Common stock, par value $0.0001 per share. 50,000,000 shares authorized, 24,282,710 issued and outstanding at May 31 and February 28, 2006.		2,428			2,428
Additional paid-in capital		343,073,025			343,073,025
Accumulated deficit		(340,074,431	)		(338,992,470	)

Total stockholders’ equity		3,001,022			4,082,983

Total liabilities and stockholders’ equity	$	6,347,160		$	7,891,377

See accompanying notes to the unaudited condensed consolidated financial statements.

AURA SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MAY 31, 2006 AND 2005

(Unaudited)

	Three Months
	2006			2005

Net Revenues	$	244,462		$	530,703

Cost of goods		231,156			195,052

Gross Profit		13,306			335,651

Expenses
Engineering, research and development expenses		291,005			516,669
Selling, general and administrative		787,285			1,068,909

Total costs and expenses		1,078,290			1,585,578

Loss from operations		(1,064,984	)		(1,249,927	)

Other (income) and expense
Interest expense, net		28,081			317,625
Change in derivative liability		-			3,801,457
Gain on disposition of assets		(4,800	)		-
Other income, net		(6,303	)		(7,125	)
Loss before minority interest	$	(1,081,962	)	$	(5,361,884	)
Minority interest in net loss of consolidated subsidiary		-			(98,942	)

Net Loss	$	(1,081,962	)	$	(5,262,942	)

Total basic and diluted loss per share	$	(0.05	)	$	(4.05	)

Weighted average shares used to compute basic and diluted loss per share		24,282,710			1,299,036

See accompanying notes to the unaudited condensed consolidated financial statements.

AURA SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MAY 31, 2006 AND 2005

(Unaudited)

	2006			2005

Net cash used in operations	$	(1,400,190	)	$	(789,876	)

Investing activities:

Acquisition of property and equipment		(19,153	)		-
Proceeds from escrow on sale of building		595,000			-
Collections on investor receivables		-			231,666

Net cash provided by investing activities		575,847			231,666

Financing activities:

Issuance of debt		-			116,928
Repayment of debt		-			(32,372	)
Issuance of convertible notes		-			288,815
Net proceeds from sale of Series B preferred stock		-			123,463
Proceeds from escrow on sale of stock		2,059,864			-

Net cash provided by financing activities:		2,059,864			496,834

Net increase (decrease) in cash		1,235,521			(61,376	)

Cash and cash equivalents at beginning of period		472,482			61,376

Cash and cash equivalents at end of period	$	1,708,003		$	-

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	-		$	90,996
Taxes	$	-		$	-

Unaudited supplemental disclosure of non-cash investing and financing activities:

During the quarter ended May 31, 2006, $59,916 in accrued and unpaid interest was added to the notes payable.

See accompanying notes to the unaudited condensed consolidated financial statements

AURA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2006

(Unaudited)

1) Basis of Presentation

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

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications for comparability necessary to present fairly the financial position of Aura Systems, Inc. and subsidiaries at May 31, 2006 and the results of its operations for the three months ended May 31, 2006 and 2005.

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

2) Going Concern

In connection with the audit of its consolidated financial statements for the year ended February 28, 2006, the Company received a report from its independent auditors that includes an explanatory paragraph describing uncertainty as to the Company’s ability to continue as a going concern. Except as otherwise disclosed, the condensed consolidated financial statements have been prepared on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s consolidation and reduction of the scope of its operations has resulted in several writedowns of assets, which have occurred over time as the Company determines, based on its current information, that such asset is impaired. Further write-downs may occur.

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

Management raised new financing upon exit from bankruptcy, and will seek to raise additional financing to fund the Company’s operations.

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

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

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

3) Summary of Significant Accounting Policies

Principles of Consolidation

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

Revenue Recognition

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

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

Cash and Cash Equivalents

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

Accounts Receivable

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

Inventories

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

Property, Plant, and Equipment

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

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

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

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

Minority Interest

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

Income Taxes

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

Estimates

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

Recently Issued Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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

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

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

A brief description of the provisions of this Statement

The date that adoption is required

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

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

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

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

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

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

4) Inventories

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

	May 31, 2006			February 28, 2006
	(unaudited)
Raw materials	$	2,924,618		$	2,909,930
Finished goods		4,528,059			4,637,685
Reserved for potential product obsolescence		(2,967,751	)		(2,967,751	)

		4,484,926			4,579,864
Non-current portion		3,666,134			3,964,864

Current portion	$	818,792		$	615,000

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

We do not expect to realize all of our inventories within the 12-month period ending May 31, 2007. Because of this, we have assessed the net realizability of these assets, the proper classification of the inventory, and the potential obsolescence of inventory. The net inventories as of May 31, 2006 and February 28, 2006, which are not expected to be realized within a 12-month period, have been reclassified as long term. We have also recorded a reserve for obsolescence of $2,967,451 at May 31, 2006 and February 28, 2006.

5) Property, Plant & Equipment

Property, plant, and equipment at May 31, 2006 and February 28, 2006 consisted of the following:

	May 31, 2006		February 28, 2006

Machinery and equipment		898,653		911,308
Furniture and fixtures		1,364,865		1,509,452

		2,263,518		2,420,800
Less accumulated depreciation and amortization		2,221,661		2,394,131

Property, plant and equipment, net	$	41,857	$	26,669

Depreciation and amortization expense was $8,474, for the three month period ended May 31, 2006, and $65,091 for the year ended February 28, 2006

6) Accrued expenses

Accrued expenses at May 31, 2006 and February 28, 2006 consisted of the following:

	May 31, 2006		February 28, 2006

Accrued payroll and related expenses	$	191,365	$	178,170
Accrued interest		-		16,833
Other		304,779		333,189

Total	$	496,114	$	528,192

7) Notes Payable and Other Liabilities

Notes payable and other liabilities consist of the following:

	May 31, 2006		February 28, 2006
	(unaudited)
Note payable (a)	$	2,584,916		2,525,000
Less: current portion		246,692		48,766

Long-term portion	$	2,338,224	$	2,476,234

(a) Represents notes payable dated January 31, 2006, bearing interest at a rate of 7% per annum and secured by substantially all our assets. The notes carry a term of five years with interest accruing the first twelve months, principal and interest payments beginning the thirteenth month, and continuing through month sixty. During the quarter ended May 31, 2006, $59,916 in accrued and unpaid interest was added to the notes payable.

8) Capital

We did not issue shares of Common Stock or Preferred Stock during the quarter ended May 31, 2006. During the quarter ended May 31, 2005, we issued 24,693 shares of Series B Convertible Preferred Stock for consideration of $123,463.

Warrants

As of February 29, 2004, the aggregate number of outstanding options, warrants, and common share equivalents was significantly in excess of the authorized but unissued number of shares of our common stock. Management intends to seek shareholder approval of an increase in the Company's authorized shares sufficient to satisfy all existing commitments and create available shares for potential future investments. However, such approval has not been granted. Hence, the management determined that the value of the warrants is required to be classified as a liability under the provisions of EITF 00-19 - Accounting for Derivative Financial Instruments Indexed To and Potentially Settled In a Company's Own Stock. As of February 28, 2005, we reclassified the value of the warrants to a derivative liability. There is no longer a derivative liability at May 31, 2006.

The warrants granted during bankruptcy settlement were valued using the following black schools assumptions:

Risk free interest rate -5.25%

Dividend Yield - 0.0%

Volatility - 50%

Expected term - 5 years

Activity in issued and outstanding warrants was as follows:

	Number of Shares			Exercise Prices
Outstanding, February 28, 2005		574,684		$	6.76-858.52
Cancelled		(574,684	)	$	6.76-858.52
Issued		5,022,948		$	2.00-3.00
Exercised		-		$	-
Outstanding, February 28, 2006		5,022,945		$	2.00-3.00
Issued		-			-
Exercised		-			-
Outstanding May 31, 2006		5,022,948		$	2.00-3.00
There was no aggregate intrinsic value of the warrants as of May 31, 2006.

9) Significant Customers

In the three months ended May 31, 2006, we sold AuraGen related products to one significant customer for a total of approximately $45,000, or 18% of net revenues. This customer is not related to or affiliated with us.

At May 31, 2006, we held accounts receivable from two significant customers for a total of approximately $46,000, or 76% of net receivables. Neither of these customers are related to or affiliated with us.

In the three months ended May 31, 2005, we sold AuraGen related products to two significant customers for a total of approximately $117,752 or 22% of net revenues. These customers are not related to or affiliated with the Company.

At May 31, 2005, we held accounts receivable from two of these significant customers for a total of approximately $98,000 or 22% of net receivables. None of these customers are related to or affiliated with us.

10) Litigation

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

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

11) Subsequent events

Capital Transactions

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

In the nine months ended November 30, 2007, we issued 5,614,650 shares of common stock for net proceeds of $5,377,080. We also issued 183,532 shares of common stock upon conversion of $183,532 of secured notes payable.

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

Forward Looking Statements

This Report contains forward-looking statements within the meaning of the federal securities laws. Statements other than statements of historical fact included in this Report, including the statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding future events or prospects are forward-looking statements. The words “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans” “would “should,” “may,” or other similar expressions in this Report, as well as other statements regarding matters that are not historical fact, constitute forward-looking statements.. We caution investors that any forward-looking statements presented in this Report are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:

Our ability to generate positive cash flow from operations;

Our ability to obtain additional financing to fund our operations;

Our business development and operating development; and

Our expectations of growth in demand for our products.

For further information regarding these and other risks and uncertainties, we refer you to Part I, Item 1A of our Form 10-K for the fiscal year ended February 28, 2007.

We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except to the extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place undue reliance on these forward-looking statements.

Overview

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

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

Our financial statements included in this report have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from our possible inability to continue as a going concern.

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

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

Results of Operations

For the three month period ended May 31, 2006:

Our net loss for the three months ended May 31, 2006 (the "First Quarter FY2007") was $1,081,962, compared to a net loss of $5,262,942 for the three months ended May 31, 2005 (the "First Quarter FY2006"). Net revenues and gross profit were $244,462 and $13,306 respectively, in the First Quarter FY2007 and $530,703 and $335,651, respectively, in First Quarter FY2006.

Net revenues for the First Quarter FY2007 decreased to $244,462 from $530,703 in the First Quarter FY2006. This represents a decrease of $286,241 (54%) from the First Quarter FY2006. This was due to the reductions we instituted as a result of filing bankruptcy.

Cost of goods increased to $231,156 in the First Quarter FY2007 from $195,052 in the First Quarter FY2006. This was a result of the mix of products sold.

Engineering, research and development expenses decreased by $225,664 (44%), to $291,005 in the First Quarter FY2007, from $516,669 in the First Quarter FY2006. We reduced our research and development activities throughout fiscal 2005 and 2006, but expect these efforts to begin to increase later in fiscal 2007.

Selling, general and administrative ("SG&A") expenses decreased to $787,285 in the First Quarter FY2007 from $1,068,909 in the First Quarter FY2006; a decrease of $281,624 (26%), due to the reductions in our workforce as a result of our filing bankruptcy.

Net interest expense for the First Quarter FY2007 decreased $289,544 to $28,081 from $317,625 in the First Quarter FY2006. The decrease is due to the lower levels of debt in the current year quarter, combined with interest earned on the larger cash levels we had in the current year quarter.

We recorded an expense of $3,801,457 for the First Quarter FY2006, as a change in derivative liability for warrants that were exercisable, but for which there were not sufficient shares authorized. There was no comparable expense in the current year period.

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Inventory Valuation and Classification

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

Valuation of Long-Lived Assets

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

Specific asset categories are treated as follows:

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

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

Long-Term Investments: As we do not hold a sufficient interest in our investments to exercise significant influence and the fair market value of the investments are not readily determinable, long-term investments have been accounted for under the cost method. Management reviews financial and other available information pertaining to such investments to determine if and when a decline, other than temporary, in the value of any investment has occurred and an adjustment is warranted.

Patents and trademarks: As our business depends on using new technology to create new products, impairments in patents can be triggered by changed expectations regarding the foreseeable commercial production of products underlying such patents.

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

Liquidity and Capital Resources

We had cash of $1,708,003 and $472,482 at May 31 and February 28, 2006, respectively. For the three months ended May 31, 2006 and the year ended February 28, 2006, we incurred a net loss of $1,081,962 and reported income of $6,864,488 respectively, on net revenues of $244,462 and $1,756,105, respectively. We had working capital at May 31 and February 28, 2006 of approximately $1.6 million and $2.6 million, respectively.

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

At May 31, 2006, we had accounts receivable, net of allowance for doubtful accounts, of $61,432 compared to $87,808 at February 28, 2006.

We purchased property and equipment valued at $19,153 during the First Quarter FY2007, but had no purchases in the First Quarter FY2006. We have no material capital project that would require funding. We believe our current plant and equipment is sufficient to support our current level of sales.

No debt repayments were made in First Quarter FY2007 as compared to $32,372 in First Quarter FY2006.

Capital Transactions

During the quarter ended May 31, 2006, we did not issue any shares of common stock. During the quarter ended May 31, 2005, we issued 24,693 shares of Series B Convertible Preferred Stock for consideration of $123,463.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit, is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures and have concluded, as of May 31, 2006, that they were not effective in view of our delinquent filings.

As of May 31, 2006, we were delinquent in filing all quarterly and annual SEC reports due since November 30, 2004. We did not have adequate financial resources to engage our outside auditors and ensure the timely filing of Form 10-K for the fiscal year ended February 28, 2005. In June 2005 our financial condition required us to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. The commencement of the bankruptcy proceeding placed additional demands on our then existing accounting personnel, including the filing of monthly financial reports with the bankruptcy court and the SEC. Our limited financial and personnel resources did not allow us to fully address our reporting obligations under the Securities Exchange Act of 1934 until we emerged from bankruptcy on January 31, 2006. We continued to be hampered by other events which further delayed the filing of our delinquent SEC reports. Specifically, the integrity of our financial records was severely disrupted as a result of errors made by temporary file personnel in December 2005 in the course of moving our principal office from 2335 Alaska Avenue to our Utah Avenue location. This problem was compounded by a change in accounting personnel in February 2006.

In February 2006, when we successfully emerged from bankruptcy under a plan of reorganization, we retained a new Chief Financial Officer and other accounting personnel. In May 2006we engaged new auditors to audit our financial statements for fiscal years from and after February 2005 and to review our interim quarterly financial statements for all subsequent quarters.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal quarter ended May 31, 2006, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

We did not issue any shares of our common stock during the quarter ended May 31, 2006.

ITEM 6. Exhibits

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

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

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

SIGNATURES

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

AURA SYSTEMS, INC.

(Registrant)

Date: March __, 2008

By: /s/ Mevin Gagerman

Melvin Gagerman

Acting Chief Financial Officer

(Principal Financial and Accounting Officer

and Duly Authorized Officer)