AURA SYSTEMS INC - Annual Report: 2010 (Form 10-K)

feb22010.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

[Ö ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended.................................................February 28, 2010

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 incorporation or organization)	(I.R.S. Employer Identification No.)

1310 E. Grand Ave.

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:

Name of each exchange on which registered: None

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Nox

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes¨ Nox

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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. ¨

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

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated filer ¨ Smaller Reporting Company 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. Yesx No ¨

On August 31, 2009 the aggregate market value of the voting stock held by non-affiliates of the Registrant was $44,400,450. The aggregate market value has been computed by reference to the last sale price of the stock on August 31, 2009.

On May 17, 2010, the Registrant had 53,703,207 shares of common stock outstanding.

TABLE OF CONTENTS


PART I
	ITEM 1. BUSINESS
	ITEM 1A. RISK FACTORS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. (Reserved)
	ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

PART II
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A(T). CONTROLS AND PROCEDURES
	ITEM 9B. OTHER INFORMATION

PART III
	ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

	SIGNATURES

SPECIAL NOTE REGARDING 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 headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Report 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.

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.

References in this Report to “we”, “us”, “the Company,” “Aura” or “Aura Systems”, includes Aura Systems, Inc. and its subsidiaries.

WHERE YOU CAN FIND MORE INFORMATION

As a public company, we are required to file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any of our materials on file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, DC 20549. Our filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. We also make available copies of our Forms 8-K, 10-K, 10-Q, Proxy Statement and Annual Report at no charge to investors through our website, http://www.aurasystems.com, as soon as reasonably practicable after filing such material with the SEC.

PART I

ITEM 1. BUSINESS

Introduction

We design, assemble and sell the AuraGen®, our patented mobile power generator that uses the engine of a vehicle or any other prime mover to generate electric power. The AuraGen® delivers on-location, plug-in electricity for any end use, including industrial, commercial, recreational and military applications. The AuraGen® system consists of three primary subsystems (i) the patented axial design alternator, (ii) the electronic control unit (“ECU”) and (iii) mounting kit that is a mechanical interface between the alternator and the prime mover. Compared to the traditional solutions addressing the multi-billion dollar North American mobile power market (i.e., Gensets, traditional alternators, permanent magnet alternators, dynamic and static inverters), we believe the AuraGen® provides alternating current (“AC”) power as well as simultaneous direct current (“DC”) power with greater reliability and flexibility at a lower cost to the end user and significantly environmentally cleaner. We began commercializing the AuraGen® in late 1999 as a 5,000-watt 120/240V AC machine compatible with certain Chevrolet engine models. In 2001, we added an 8,000 watt configuration and also introduced AC/DC and the Inverter Charger System (“ICS”) options. In Fiscal 2008, we introduced a dual system that generates up to 16,000-watts of continuous power and we plan to introduce additional power configurations during calendar 2010. We now have configurations available for more than 90 different engine types, including a majority of General Motors and Ford models, some Chrysler models and numerous other engine models made by International, Isuzu, Nissan, Hino (Toyota), Mitsubishi, Caterpillar, Detroit Diesel, Cummins, and Freightliner. Also starting in fiscal 2008, the AuraGen has been installed on a number of boats for both government and recreational end users. In the middle of fiscal 2009, we introduced and began to sell our all-electric Transport Refrigeration Unit (“TRU”) for mid size trucks. The system consists of the AuraGen power solution and an all-electric transport refrigeration system. To date, AuraGen® units have been sold in numerous industries, including transport refrigeration, utilities, telecommunications, emergency/rescue, public works, catering, oil and gas, transportation, government and the military.

In May 2008, we entered into an agreement with Emerald Commercial Leasing, Inc., of Conley, Georgia, whereby we acquired the transport refrigeration assets of Emerald, including all rights to drawings, designs, sketches, layouts integration know-how, parts, and vendor lists for the all electric refrigeration system based on commercial refrigeration design valued at approximately $385,000. In addition, the agreement returns the previously assigned exclusive selling rights for the transport refrigeration industry to Aura. As a result, Aura was able to offer a complete TRU solution to its customers. We reached an agreement in principle to purchase their service facility for $1,050,000. The facility consists of approximately 6 acres of land and a building of approximately 10,000 square feet with several truck service bays and a small amount of office space. The facility was to be used by Aura for warehousing, service, and installation of the AuraGen for customers in the southeastern United States. Due to the national economic down turn, and in particular the uncertainties in the real estate market, the purchase of the facility was put on indefinite hold, and Aura rented the facility on a month-to-month basis for $7,000 per month. Mr. Joseph Dickman, Emerald’s President, joined Aura as Senior Vice President of sales for OEM applications. In December 2009, we terminated our lease arrangements with Emerald, settled all outstanding balances, moved into a new 8,000 square facility in McDonough Georgia and terminated our relationship with Mr. Dickman.

In March 2010, we entered into a strategic alliance with Zanotti of North America. Zanotti is a 50-year-old Italian company specializing in refrigeration for the food industry with distribution in over 70 countries. The strategic alliance consists of Zanotti providing to Aura all electric transport refrigeration systems that will support both the midsize trucks and refrigeration trailers. All of Zanotti’s North America dealers (currently approximately 70) will provide service and installation for Aura’s all-electric transport refrigeration solution (“AETRU”). The alliance also calls for Aura to exclusively use only Zanotti’s refrigeration systems and in return, Zanotti, directly or through its dealer network, is required to generate sales of no less than 1,000 systems of Aura’s AETRU during the first 24 months of the agreement and thereafter no less than 750 systems per year in order to maintain its’ exclusivity. In addition Zanotti North America agreed to provide Aura with a credit facility for the purchase of the refrigeration systems. Currently the parties are working closely on optimizing the AETRU packages as well as on a joint marketing plan. Deliveries of the Aura/Zanotti AETRU are expected to start in June 2010.

applications to WePower, and in return Aura will be the exclusive supplier of generators to WePower for their wind-turbines. The agreement required WePower to purchase from Aura a minimum of 3,000 systems per year. The domestic as well as the global economic recession has caused significant slowdown in demand for small wind turbines and WePower, like others in its industry, has drastically revised downward their forecast from 3,000 annual units to less than 700 systems per year. The delivery of the initial order for 700 systems has been extended to 2011. In order to meet the WePower requirements we have to customize the AuraGen by changing the number of poles in the machine to allow for lower RPM power generation. Aura is yet to perform this required customization, which involves changing the winding on the stators. We anticipate the completion of the customization during the third quarter of fiscal 2011 and expect to begin delivery of systems to WePower during the current fiscal year.

In June 2009 we entered into an exclusive commercial and industrial distribution agreement with Genergy Inc. for the distribution of AuraGen products in the Republic of Korea (ROK). The initial agreement was for a period of five years with automatic renewals for two two-year periods, provided the distributor has complied with all of its obligations. Under the agreement, Genergy Inc. is required to purchase a minimum of $9.5 million over the initial contract life to retain the distribution agreement. By the end of 2009 Genergy Inc. failed to pay the initial required fees and Aura terminated the agreement. We are currently exploring any legal remedies that may be available.

Seokmun Inc. a South Korean company has been Aura’s distributor for military applications since 2006. Seokmun in 2007 won a 10-year program from the Korean Army to deliver 1,000 AuraGen VIPERs (100 per year). To date Aura has delivered 300 such systems and will deliver the next 100 systems later this year. In addition Seokmun was successful in winning the NRRS Korean military program for approximately 132 dual VIPER systems to be delivered over the next three-year period. In addition there are numerous other VIPER programs currently under consideration by the South Korean military. Due to the successful business relationship, Aura has recently entered into discussions with Seokmun to also become our commercial and industrial distributor in South Korea.

The AuraGen®

The AuraGen® is composed of three basic subsystems. The first subsystem is the generator that is bolted to, and driven by, the vehicle's engine or any other prime mover. The second subsystem is the ECU, which filters, conditions the electricity to provide clean, steady voltages for both AC and DC power, and provides for variable speed applications as well as load following for increased efficiency (load following means that at any instant the power generated is equal to the power demanded up to the maximum rated power). The third subsystem consists of mounting brackets and supporting components for installation and integration of the generator with the vehicle engine or the prime mover.

The AuraGen is a load following machine, and is now available in three continuous power levels, (a) 5,000 watts AC/DC, (b) 8,000 watts AC/DC and (c) 16,000 watts AC/DC. All AC power is pure sine wave with total harmonic distortion of less than 2.1% and is available in both 120 VAC and or 240 VAC. In addition, the power generated on all models can be partitioned to provide simultaneous AC and 14 or 28 volts of DC or only DC, if required by the user. The AuraGen power levels can be generated as the prime mover speed varies from stationary to maximum rated speed. The VIPER (the military version of the AuraGen® system includes as an option a complete power management system which (i) monitors in real time the batteries’ voltage and temperature, (ii) provides a partition of the power between AC and DC simultaneously with the ability to be programmed from all AC to all DC, (iii) monitors the RPM of the generator, (iv) monitors the temperatures of the generator and the ECU, (iv) monitors the raw power generated, (v) monitors both the AC and DC loads as to voltage and current, (vi) provides programming of load prioritization and load shedding, and (vii) monitors the voltage of the internal 400VDC buss.

We provide custom engineered brackets for our models that attach to over 90 different engine and chassis models. We also provide Power Take Off (“PTO”) and hydraulic driven interfaces for bigger trucks that do not involve direct attachment to the vehicle engine.

Mobile and Remote (not power grid connected) Power Industry

The mobile and remote power generation market is large and growing. Vehicles used in the telecommunications, utilities, public works, construction, catering, and oil and gas industries, emergency/rescue and military and recreational vehicles rely heavily on mobile power for their internal systems. In addition, mobile work sites require on-location electricity to power equipment ranging from computers to power tools. Hybrid vehicles are rapidly penetrating the market place and require a significant amount of on board electric power. In addition to vehicle

related applications, wind turbines and other stationary applications require a solution that converts mechanical energy into electrical energy.

Based on studies conducted by the U.S. government, Business Communications Company, Inc. and others, we estimate the annual gross North American market for non hybrid vehicle related mobile power generation use in 2008 was at least $2.5 billion and growing. Worldwide growth is expected to be fueled by increases in the development and construction of industrial infrastructures, significant growth in homeland security expenditures, and increased use of sophisticated electronic equipment in underdeveloped areas where grid-based electricity is unavailable or unreliable. We also believe that mobile power has become increasingly important as backup to electric grid power supply. The need for on board power for hybrid vehicles is increasing rapidly and is expected to surpass demand for 500,000 annual units shortly. Global environmental awareness and considerations are driving the demand for wind-power and the market is estimated in many billions of dollars annually. All wind generated power systems use a generator to convert wind energy to electric energy. The AuraGen provides a variable speed efficient generator to convert the mechanical energy harvested by the wind turbine from the wind energy to electrical energy. WePower currently focuses on small to medium (1-100 kW) vertical wind turbines and under the agreement the AuraGen will be used exclusively by WePower for its vertical wind turbines. The current AuraGen configuration is designed to provide power in the 1-8.5 kW range, and for higher power levels we combine multiple AuraGens on a common shaft. To date we have successfully combined two units on a single shaft to provide 16 kW of power. While in principal there is no difference between combining 2 or more AuraGens on a single shaft, we have not done so as of yet. During 2010 we plan to develop an AuraGen capable of generating 30 kW and up to 100 kW of power without the need of combining systems.

The traditional available solutions for mobile and remote power users are:

Gensets, Gensets are standalone power generation units that are not incorporated into a vehicle and require external fuel, either gasoline or diesel, in order to generate electricity. Gensets (i) are generally noisy and cumbersome to transport because of their weight and size, (ii) typically run at constant speed to generate 50 or 60 Hz of AC power, (iii) must be operated at a significant part of the rated power to avoid wet staking, (iv) are significantly derated in the presence of harmonics in the loads and (v) require significant scheduled maintenance and service. Genset technology has been utilized since the 1950s.

High-Output Alternators, High-output alternators are traditionally found in trucks and commercial vehicles and the vehicle’s engine is used as the prime mover. All high-output alternators provide their rated power at very high RPM and significantly less power at lower RPM. In addition, high-output alternators are generally only 30% efficient at the low RPM range and increase to 50% efficiency at the high end of the RPM range. The power generated by high-output alternators is 12 or 24 Volt DC and an inverter is required if 120 Volt AC power is needed. In addition, due to the low power output at low RPMs, in order to get significant power, a throttle controller is used to speed-up the engine.

Inverters, Inverters are devices that invert battery DC to AC. Inverters as mobile power generators are traditionally used in low power requirements, typically less than 2,500 watts, and do not have the ability to recharge the batteries used as the source of power. Thus, typical inverter users require other means to recharge the used batteries such as “shore-power” or gensets. More recently dynamic inverters became available. Dynamic inverters use power from the alternator to augment power from the batteries and are able to achieve power levels in excess of 6,000 watts. Dynamic inverters introduce significant stresses on both the batteries and alternators, which causes significant life shortening for both. Dynamic inverters use power from the alternator. When the inverter is turned on, the alternator is switched off from the vehicle battery and tied into a transformer that uses electronics controls to change the DC alternator inputs to AC inverter output. A separate transformer winding provides battery charging so that fully regulated 120 Volt AC and 12 Volt DC power is available as long as the engine is running at high enough RPM to provide power for the load and the battery charging. All dynamic inverters require a high-output alternator to be able to output significant AC power. As is often the case, the limiting factor is the high-output alternator. In order to get stable output, a very accurate throttle controller is also needed to maintain steady speed on the engine.

Permanent-Magnet Alternators. Recently a number of companies have introduced alternators using exotic permanent magnets. These alternators tend to have higher power generation capabilities than regular alternators at lower engine RPM. In order to be practical in an under-the–hood environment (200oF) active cooling must be added, since the magnets are demagnetized at approximately 176oF. There are other issues

that require an active control system that will add and subtract magnetic field strength as the engine RPM increases.

Wind Turbines. Wind turbines convert wind energy into mechanical energy (prime mover). The mechanical energy is converted into electric energy through a generator. Traditional generators operate at one speed. Because the wind energy varies continuously and is unpredictable a gearbox and transmission is needed to provide the constant speed required by the generator. In addition traditional wind turbines require the capability of moving the blades into and out of the wind. There are two types of wind turbines, (i) the traditional large horizontal machines, and (ii) smaller vertical axis machines. The horizontal machines must be turned into the wind and away from the wind when the wind speed is too large. The vertical machines capture the wind from all directions and do not require a mechanism to move them into the wind. However typically they do require a brake to slow down the machine when the wind speeds are too great.

Fuel Cells. Fuel cells are solid-state devices that produce electricity by combining a fuel containing hydrogen with oxygen. They have a wide range of applications, and can be used in place of the internal combustion engine and traditional lead-acid and lithium-ion batteries. The most widely deployed fuel cells cost about $4,500 per kilowatt.

Batteries. Batteries convert stored chemical energy to electrical energy.

Competition

The industry in which we operate is competitive. The primary competition for the AuraGen® is the Genset industry, and there are approximately 44 Genset manufacturers in the United States. These competitors include: Onan, Honda and Kohler.

There are many high-output alternator manufacturers. Some of the better known ones are Delco-Remy, Bosch, Nippon Densu, Hitachi, Mitsubishi and Prestolite.

There are many manufacturers of standard electric generators. Some of the better known ones are General Electric, Westinghouse, and ABB.

There are many inverter manufacturers; some of the better known are, Trace Engineering, Vanner, and Xentrex.

The main competitors for the all-electric TRU are Thermoking and Carrier. Both Thermoking and Carrier provide diesel based TRUs for midsize trucks. The diesel based comparable systems provided by Thermoking and Carrier are approximately $6,000 less expensive than the Oasis, however they require frequent regular scheduled maintenance and a separate diesel engine that consumes approximately 0.4-0.6 gallons of fuel per operating hour.

We do not compete with anyone for the generators that will be used by WePower since our agreement calls for us to be the sole supplier of generators to WePower. There are a number of small manufacturers who provide vertical wind turbines in direct competition with WePower. These other vertical wind turbine manufacturers use other types of generators such as permanent magnet alternators (see above), or DC and conventional induction machines.

Most of our competitors have greater financial, technical, and marketing resources than the Company, have larger budgets for research, new product development and marketing, and have long-standing customer relationships. We also compete with many larger and more established companies in the hiring and retention of qualified personnel. Our financial condition has limited our ability to market the AuraGen® aggressively.

The AuraGen® uses new technology and has only been available in the marketplace for a few years. As described below, because our product is radically different from traditionally available mobile power solutions, users may require lengthy evaluation periods in order to gain confidence in the product. OEMs and large fleet users also typically require considerable time to make changes to their planning and production.

Because of our limited financial and staff resources, we have focused our sales and marketing activities to a few industrial and military segments. In particular, we have focused on selling to the U.S. military, including the U.S. Coast Guard (the “USCG”), homeland security agencies and emergency/rescue operations, such as the Federal Emergency Management Agency.

More recently we expanded our focus and are now marketing to companies in the oil and gas segment, the transport refrigeration segment, state and local governments, in particular, the Department of Transportation (“DOT”), and the recreational boating industry.

Competitive Advantages of the AuraGen®

We believe the AuraGen® is a superior product due to its convenience, cost efficiency, fuel efficiency, reliability, flexibility in power output, quality of the electricity generated, and its ability to provide the full power at variable speeds as well as provide load following architecture. The AuraGen® is not sensitive to temperature or altitude variations and generates the rated power at or near idle engine RPM.

The ability to operate at variable speed makes the Aura solution very attractive when the speed of the prime mover varies and is unpredictable, such as wind turbines and automotive applications. The variable speed solution is a direct consequence of our system architecture where we separated the power generation from the power delivery by the power buss.

The load following capability is also a direct result of the system architecture and the separation of the power generation from the power delivery. The user always draws power from the power buss and the generator only fills the power buss with whatever power was drained by the user.

The AuraGen® does not require scheduled maintenance and is offered with a three-year warranty, compared to the typical one-year warranty available for a Genset or inverter.

In addition, the AuraGen® is significantly cleaner for the environment than Gensets, the other generally available mobile power solution. The AuraGen® uses the automotive engine, which is highly regulated for environmental protection. Gensets use small engines that produce significantly higher levels of emissions per unit of power output than the automobile engine.

The all-electric transport refrigeration AETRU system provides an environmentally friendly solution that also provides significant cost savings to the users. When life cycle costs are compared between the AETRU and the diesel based solution over a 7 year period (typical life time for a TRU) the AETRU system could potentially save an average user approximately $20,000. In addition the AETRU solution provides zero emissions since the extra diesel is completely eliminated. This is a significant marketing advantage for those customers who care about the environment. The refrigeration component of the AETRU system is modeled after commercial refrigeration system that does not require any custom parts.

The AuraGen power solution, or wind turbine, is different from all other known solutions in the market place. The AuraGen system architecture that separates the power delivery from the user provides the AuraGen with the ability to provide a system that can ensure the end user of uninterrupted power when wind is just not available as well as load following for higher efficiencies and lower operating costs. In addition, the nature of the AuraGen is such that it can be used as a motor to start the mechanical turbine and also as a brake when wind speeds become too high. The system ability to supply pure sine wave AC power provides the ability to connect to the power grid and the ability to supply DC power allows for charging batteries. The overall system with the built in inverter and bi-directional power supply is significantly cheaper than other solutions where the sine wave inverter alone can cost as much as $0.80 per watt ($4,000 for a 5 kW inverter).

We believe that barriers to entry make it less likely that a product superior to the AuraGen® will become available in the foreseeable future. The inventions upon which the AuraGen® is based are protected by patents issued by the U.S. Patent Office. To our knowledge, there are no other patents for axial induction machines with solid rotors such as the AuraGen®.

Manufacturers and end users of mobile power solutions (including the military) typically require completion of extensive evaluation and approval processes before embracing new systems. After extensive testing, a number of federal, state, DOT departments, and some major industrial companies have approved the AuraGen® for purchase.

Thousands of AuraGen® units are currently being used for multiple applications and in all types of operating environments, providing a good sample set for reliability analysis. The results show very low failure rates, which we are reducing further via minor hardware and software modifications, better assembly procedures and improved installation training. The U.S. Army has performed its own tests and is continuing to test the AuraGen® under severe conditions. The VIPER, in use by the Special Forces and other combat forces, has been air-drop-certified by the U.S. Army and has been, and is, successfully deployed in Operation Enduring Freedom and Operation Iraqi Freedom.

The AuraGen® system passed all of the Underwriters Laboratories (“UL”) testing in 2002 and 2003. In late 2004 and early 2005 the U.S. Marine Corps successfully tested the VIPER for safety and other operational capabilities at the Aberdeen Test grounds.

Target Markets

Military, Homeland Security Administration and Other Federal Agencies

We believe the VIPER is a superior mobile power solution compared with existing alternatives for numerous military applications. The VIPER capability to produce both 120 Volt AC and 28 Volt DC power simultaneously at low engine RPM is critical for many military applications. In addition, the VIPER’s power management system provides military users with the ability to monitor the quality and quantity of available power, the state of the on-board batteries, and the ability to prioritize different electric loads. The USCG, after three years of testing, selected the VIPER as the power system for its 190 new patrol boats; SAIC is using the VIPER on all of its VACIS gamma ray scan systems that are used for homeland and base security applications, and numerous units of special forces and regular army are using the VIPER in both Iraq and Afghanistan. The Department of Defense issued a report to Congress in August 2006, which discussed the success of the VIPER in Iraq and Afghanistan. More recently in May 2009, at the Joint Service Power Expo, the Advance Research Lab (a U.S.N. facility) under the U.S. Army contract, presented the results from their testing of numerous alternators to determine their power output at low RPM and at elevated under the hood temperatures that are expected in desert warfare. The results show that our VIPER system was the only tested device that performed as advertised. All the other tested systems only generated approximately 50% of the rated power at idle speed and had significant further de-rating as the temperature increased. Currently a number of military OEMs are exploring the use of the VIPER for various military programs.

Marine

We believe that the AuraGen® is an ideal product for recreational boats with a length of 25 to 50 feet. The National Oceanic and Atmospheric Administration tested the AuraGen® on the “Magna Spirit”, a research vessel, for 3,000 miles on the open ocean and reported flawless performance. The USCG tested the VIPER for three years before choosing it to power 190 new patrol boats. The United States Navy also tested the VIPER for over 10,000 nautical miles with flawless performance. All of these organizations are leaders in the introduction of new technologies and safety for marine applications. More recently a major boat OEM successfully tested the AuraGen® on one of their production boats, and the Company is currently pursuing the required boat related certifications from UL. While the Company is not expecting any delays in getting the required certification, no assurances can be given as to when, or if, such required certification will be completed.

Oil and Gas Industry

The oil and gas industry is a heavy user of mobile power for service. We have identified a number of oil and gas service providers that require the power level, as well as the power quality, generated by the AuraGen®. In particular, there is a need for very large power to start inductive loads such as compressors, fans and electric motors. Typically the starting power required is known as lock rotor and can easily reach 30,000 watts. The AuraGen® ICS design and architecture is such that it can easily support these power levels for the very short times that are required to start the loads. We have demonstrated 30,000 watts starting power for numerous compressors and motors.

Mid - Size Refrigeration Trucks

Mid size refrigeration trucks are used throughout the country for the delivery of food. These trucks typically have a diesel engine mounted over the cab that is used as a generator for the refrigeration unit. The AuraGen® is an ideal power source that can eliminate the need for the extra diesel engine thus reducing operating cost and fuel costs. The AuraGen’s® ability to provide high wattage, start-up power is critical for this application, since a typical refrigeration system requires a two to four horsepower compressor. Such compressors require 20,000 to 30,000 watts of starting power. The Company has now sold over 100 systems for this application and is anticipating significant growth in this segment.

Emergency/Rescue

The emergency/rescue market relies heavily upon mobile power for lights, communications gear, instruments, medical equipment and digital equipment and tools. As the emergency/rescue market has undergone a transition to digital equipment and portable computers, it has experienced constant growth in mobile power needs. Approximately 20 of these organizations have started to use the AuraGen®. The Red Cross has used the AuraGen® to power its communication needs in support of disaster relief during Hurricane Katrina and the wildfires in California in October 2007. In addition, hundreds of fire trucks are now using the AuraGen® as their mobile power source.

Wind Turbines

The market for wind energy is exploding as governments and people are looking for alternative sources of energy. Traditional wind energy solutions are based on horizontal wind turbines with one or more blades. Such machines can vary in size from very small to extremely large with blades that are more than 200 feet long. All such machines require a high tower, and a mechanical system that can rotate the turbine into the wind direction and away from the wind when it becomes too strong. These machines need substantial open space and are not found in cities. A less common solution that is gaining acceptance rapidly is based on a vertical design. In such a design the turbine is always in the wind, considerable less space is needed, it is more aesthetically appealing, and the generator and support equipment can be placed on the ground. WePower is aggressively pursuing the vertical design solution.

The AuraGen is an ideal solution for this application due to the unique design architecture that provides the end user with flexibility and uninterrupted power as wind conditions change. The unique design provides both AC and DC power capabilities allowing easy integration into the grid and ability to charge batteries. The electronic control box also provides the ability to perform at variable speed (wind speed is unpredictable or controllable) without the need for a gearbox or transmission, resulting in both upfront cost savings as well as maintenance and operating cost savings.

Facilities, Manufacturing Process and Suppliers

Our facilities consist of approximately 55,000 square feet in El Segundo, California and 8,000 square feet in McDonough Georgia. The El Segundo facilities consist of two buildings (approximately 27,500 sq ft each), one that is currently being used for assembly and testing using components that are produced by various suppliers and the other is used for general offices, engineering and warehousing. The Georgia facility is used for installation and service. Since December 2007, we have been on a month-to-month lease in the assembly and testing building, and for the second building we entered into a 5-year lease in May 2008. The combined rent for both El Segundo facilities is approximately $55,000 per month. The rent in McDonough is approximately $4,000 per month. We anticipate the consolidation of our two El Segundo facilities during fiscal 2011 into the general office end engineering building. To that end, we are planning leasehold improvements that include expanding the second floor (estimated to cost approximately $200,000) to increase the total available footprint to approximately 45,000 square feet. We feel this facility will be sufficient for our current needs.

Early in our AuraGen® program, we determined it was most cost-effective to outsource production of components and sub-assemblies to volume-oriented manufacturers, rather than produce these parts in-house. As a result of this decision, and based on then anticipated sales, prior to fiscal 2001 we purchased, a substantial inventory of components and sub-assemblies at volume prices. Since sales did not meet our expectations, we have been assembling, testing and selling product from this inventory for several years. In order to renew our inventory of components, we will need to renew contracts with such manufacturers or locate other suitable manufacturers. Since

we emerged from our Chapter 11 reorganization in January 2006, we have renewed our relationships with a number of our old suppliers and are developing relationships with others. To ensure quality and reliability in the field, we use highly qualified suppliers, the majority of which are ISO 9002 compliant.

Distribution and Product Support

We provide a turnkey product and service to support our customers in every area. We have performed all of the development, from basic physics to detailed engineering. We believe our core capabilities provide a solid foundation to resolve technical issues, develop an ongoing line of new products and continually enhance our products.

Our vehicle integration team develops, engineers, and supplies all of the brackets, pulleys, idlers, belts, tensioners and other components that comprise a mounting system. The group also specifies all of the requirements of the AuraGen® to allow its use with other mobile drives, such as hydraulic systems and PTO applications.

Our sales and distribution efforts can be classified into three groups; (i) direct sales, (ii) distribution agreements, and (iii) OEM agreements. We employee a sales force, who is compensated with a modest base salary, and commissions based on sales. Our wind related applications are through the distribution and supply agreement that we entered into with WePower in February 2009. We also have an exclusive distribution agreement in Korea for military applications. We are currently negotiating with a number of other entities for distribution agreements in different parts of the globe. Our AETRU solution is being sold directly with the aid of large national as well as local leasing companies (most refrigeration trucks are leased by the end users) and more recently our strategic alliance with Zanotti North America and their distribution network. We sell directly to the military, government agencies and military contractors. While we have not yet reached any OEM agreements with truck manufacturers, we are working closely with truck manufacturers both domestic and foreign to integrate the AuraGen into their vehicle at the factory or at the port of entry.

Research and Development

We believe that ongoing research and development is important to the success of our product in order to utilize the most recent technology, to develop additional products and additional uses for existing products, to stay current with changes in vehicle manufacture and design and to maintain an ongoing advantage over potential competition. Our engineering, research and development costs increased to approximately $ 2.3 million in fiscal 2010 from $1.9 million in fiscal 2009 and is planned to increase fiscal 2011 to over $2.8 million.

We are engaged in numerous new and enhanced developments of our AuraGen/VIPER both as company sponsored research and development (“R&D”) and contract related R&D activities. Under contracts to the U.S Navy and General Dynamics with additional corporate funds we combined the output of two of our 8.5 kW systems into a single 16 kW circuit. Among other benefits, this provides us the required power solution to pursue the 40,000 BTU refrigeration trailer market. We are also developing a 3-phase solution, which will allow us to provide 3-phase shore power interface to our systems. The 3-phase solution is currently under test and we expect delivery of the first 3-phase system within the first half of the current fiscal year. We have enhanced our coil designs and are completing the required testing. Early results show significant improvements in efficiency with the new coil designs. We are developing a 30 kW system and are starting to examine a 100 kW system. Both of these systems are being developed for military applications. We expect a prototype 30 kW system by the end of the current fiscal year. In the current fiscal year we plan to design and commercialize a 7.5-8 inch system with up to 4 kW of power.

We are also enhancing our ECU to be able to (i) provide more power when the prime mover is off, and (ii) support global 240 voltages. Our current system provides approximately 4 kW when the engine is off and our enhanced system is expected to provide as much as 7 kW with the engine-off mode. To support global voltages we are changing our high voltage buss to 600VDC since global 220V systems are measured between phase and neutral as compared to the USA standards which are phase to phase.

For wind applications we are modifying our machine by increasing the number of poles such that we will have maximum generating power at much lower RPMs (wind turbine speeds are expected to be in the 100s RPM as compared to automotive applications of 1,000 RPM). We expect to have our first 12 pole machines operating by the end of September 2010.

In order to support larger power systems we are redesigning our ECU with a 1,200VDC buss and ability to handle up to 150 amps of excitation current.

Patents and Intellectual Property

Our intellectual property portfolio consists of trademarks, proprietary know-how and patents.

In the area of electromagnetic technology, we have developed numerous magnetic systems and designs that result in a significant increase of magnetic field density per unit volume that can be converted into useful power energy or work. This increase in field density is a factor of three to four, which, when incorporated into mechanical devices, could result in a significant reduction in size and cost of production for the same performance.

The applications of these technological advances are in machines used every day by industrial, commercial and consumers. We have applied technology to numerous applications in industrial machines, such as generators, motors, actuators and linear motors.

The U.S. Patent Office awarded us 29 patents applicable to automotive and industrial applications. Of those patents, four are focused directly on the AuraGen®, seven are basic magnetic actuation, two are for control systems associated with controlling the magnetic fields in different configurations and 16 are focused on the Electromagnetic Valve Actuator (“EVA”) application

The 16 patents associated with the EVA application cover the implementation of a controlled magnetic field as applied to linear motors. Many of the same techniques are implemented into the AuraGen® control systems and, in particular, the control of the high power board used in the new AuraGen® inverter mode, which uses many elements from the EVA application.

We hold the following patents: Nos. 5,734,217; 6,157,175; 6,700,214; 6,700,802; with expiration dates of 2015, 2017, 2019 and 2019 respectively. The above patents cover three areas, as described below

Induction Machine

The basic patent covers a new form of induction machine with superior performance in a much smaller size than conventional machines. The solid cast rotor, the shaped magnetic field, the secondary conduction path through the steel, and the axial magnetic orientations are key components of this innovation.

Control System

This system separates the power generation from the power delivery by introducing a 400 VDC buss. For each cycle of each phase, part of the cycle power is drawn from the bus to run the electronics and energize the coils, while during the other part of the cycle, power is delivered to charge up the buss. The control system must balance all the timing to effect zero voltage change to the buss under dynamic variations of frequency and loads. The ability to optimize in real time the slip frequency is a key innovation in motor and generator control for variable speed, variable frequency, and variable load systems.

Bi-Directional Power Supply (“BDP”)

The patented ICS system developed by Aura provides a new capability in power systems. The BDP allows a system to use multiple sources of power simultaneously. It is a key component in providing the ability to deliver both AC and DC power simultaneously, as well as the ability to handle large power surges without the need for a throttle controller.

Employees

As of May 17, 2010, we employed 61 persons, of which all are full time. We are not a party to any collective bargaining agreements.

Significant Customers

During the year ended February 28, 2010, we conducted business with three major customers whose net sales comprised 18.1%, 14.5% and 13.1% of net sales, respectively. As of February 28, 2010, 34.4% of net accounts receivable were due from these customers. During the year ended February 28, 2009, we conducted business with two major customers whose sales comprised 16.2% and 10.2% of net sales, respectively. As of February 28, 2009, three customers accounted for 30% of net accounts receivable.

Backlog

As of May 11, 2010, we had a backlog of approximately $32.6 million. Of this amount, approximately $13.5 million is expected to be delivered during fiscal 2011. Approximately $3.0 million of the backlog scheduled to be delivered after fiscal 2011 is subject to cancellation or renegotiation at the convenience of the U.S. government. At the prior year comparable period, we had a backlog of approximately $29.5 million, of which initially approximately $23.5 million was scheduled to be delivered after the 2010 fiscal year. Numerous slowdowns and delays by customers resulted in only half of the scheduled backlog for fiscal 2010 (approximately $3 million) to actually be shipped during fiscal 2010.

At the prior year comparable period, we had a backlog of approximately $29.5 million, of which approximately $23.5 million was for delivery after the 2010 fiscal year.

ITEM 1A. Risk Factors

Risk Factors Relating to Our Business

We have a history of losses and we may not be profitable in any future period.

In each fiscal year since our organization in 1987 we have not made an operating profit. We have an accumulated deficit in excess of $380 million from our inception through February 28, 2010. Since emerging from bankruptcy in January 2006, we have incurred approximately $36 million in losses. We cannot assure you that we will be able to achieve or maintain profitability or positive cash flow.

If we are unable to raise capital, our ability to implement our current business plan and ultimately our viability as a company could be adversely affected.

The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will be sufficient to fund working capital needs. In June 2005 we were forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code, from which we emerged under a court-approved plan of reorganization on January 31, 2006.

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 and require additional debt or equity financing to fund ongoing operations. If additional funds are raised through the issuance of equity securities, our shareholders' percentage ownership will be reduced, they may experience additional dilution, and these newly issued equity securities may have rights, preferences, or privileges senior to those of our current shareholders. As of the date of this report we have no commitments for debt or equity and there are no assurances that financing will be available when needed. In January 2010 we retained Cappello Capital Corp. as our exclusive financial advisor to assist with our financial needs. Currently, a number of possible parties have shown an interest in investing in the Company but no agreements have been reached yet. If we cannot raise needed funds, we would be forced to make substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.

Our auditors have qualified their report on our financial statements to indicate that there is substantial doubt as to our ability to continue as a going concern, which could adversely affect our ability to obtain third party financing.

Our auditors, Kabani and Company, have qualified their report on the current financial statements to indicate that there is “substantial doubt” about our ability to continue as a going concern. This opinion is based upon our continuing losses from operations and negative working capital position. The existence of the going concern qualification could affect our ability to obtain financing from third parties or could result in increased cost of this financing.

Our success over the short-term depends on the commercial success of the AuraGen® products, as we are not currently engaged in any other line of business.

Because we have focused our business on developing mobile power solutions in the 3,000 to 25,000 watts range, rather than on diversifying into other areas, our success in the foreseeable future will be dependent upon the commercial success of the AuraGen® product line.

We may have difficulty managing our growth.

We will need to hire employees, rebuild our sales and production infrastructure and improve our operating and financial systems in order to effectively manage any significant growth in demand for our products. If we do not effectively manage our growth, we will not be successful in executing our business plan, which could have a material adverse affect on our business, results of operations and financial condition.

The market acceptance of the AuraGen® is uncertain.

Our business is dependent upon sales generated from the AuraGen® family of products and increasing acceptance of these products. We cannot assure you that our products will achieve broad acceptance in the marketplace. The AuraGen® uses new technology and has only been available in the marketplace for a few years. Our financial condition has limited our ability to market the AuraGen® to potential customers. Because our product is radically different from traditionally available mobile power solutions, users may require lengthy evaluation periods in order to gain confidence in the product. OEMs and large fleet users also typically require considerable time to make changes to their planning and production.

Our business and prospects may be adversely affected by general economic conditions.

The national economic slowdown has resulted in deferred, delayed and cancelled orders commencing in the latter part of fiscal 2009 and may continue to adversely affect market acceptance and use of AuraGen® products.

Our business may be adversely affected by industry competition.

The industry in which we operate is competitive. We face substantial competition from companies that have been offering traditional solutions such as Gensets for the last 50 years, and there are more than 40 Genset manufacturers in the United States. These competitors include: Onan, Honda and Kohler.

In the TRU area we are competing with Thermo-king and Carrier who dominate the business in the USA. Most of our competitors have greater financial resources than we do, have larger budgets for research, new product development and marketing and have long-standing customer relationships. We must compete with many larger and more established companies in the hiring and retention of qualified personnel.

Moreover, this market may attract new competitors that have longer operating histories, greater name recognition and significantly greater financial, technical and marketing resources than us. Our failure to meet our projections for our products’ market acceptance or the ability of our competitors to capture a first mover advantage could have a material adverse impact upon our business, operating results and financial condition. Furthermore, new product introductions or product enhancements by our current or future competitors or the use of other technologies could cause a loss of market acceptance of our products.

We depend on our intellectual property to provide us with a competitive advantage.

We rely on a number of patents and patent applications to protect the AuraGen® products from unauthorized use by competitors. Our efforts to protect our proprietary rights may not prevent infringement by others or ensure that these

rights will provide us with a competitive advantage. We cannot assure you that the patents pending relating to the AuraGen® system or future patent applications will be issued or that any issued patents will not be invalidated, circumvented or challenged.

A portion of our proprietary technology depends upon trade secrets and unpatented technology and proprietary knowledge related to the development, promotion and operation of our products. While we generally enter into confidentiality agreements with our employees, consultants and vendors, we cannot assure you that our trade secrets and proprietary technology will not become known or be independently developed by competitors in such a manner that we have no practical recourse, and there can be no assurance that others will not develop or acquire equivalent expertise or develop products that render our current or future products noncompetitive or obsolete.

Litigation regarding intellectual property rights could be time-consuming and expensive and could divert our technical and management personnel from their work. We cannot assure you that such litigation expenses will not occur in the future. There also can be no assurance that other parties will not take, or threaten to take, legal action against us, alleging infringement of such parties” patents by our current or proposed products. We cannot assure you that we will have adequate financial resources to successfully institute or defend intellectual property litigation. Insurance coverage to indemnify us against liability for infringement of other parties’ intellectual property rights is either unavailable or prohibitively expensive.

We are dependent upon key employees, and we may face difficulties attracting or retaining key personnel.

Competition for key employees is intense, and we cannot assure you that we will be able to retain our key employees or that we will be able to attract, assimilate and retain other highly qualified personnel in the future. While we may enter into agreements with our employees regarding patents, confidentiality and related matters, we do not generally have employment agreements with our employees. The loss of key personnel, especially without notice, or the inability to hire or retain qualified personnel, particularly given our anticipated growth, could have a material adverse effect on our business, operating results and financial condition.

We depend on third party manufacturers for certain product components.

We rely extensively on subcontracts with third parties for the manufacture of most components of the AuraGen®. If these providers do not produce these products on a timely basis, if the products do not meet our specifications and quality control standards, or if the products are otherwise flawed, we may have to delay product delivery, or recall or replace unacceptable products. In addition, such failures could damage our reputation and could adversely affect our operating results. As a result, we could lose potential customers and any revenues that we may have at that time may decline dramatically.

Although we generally use standard industrial and electrical parts and components for our products, some of our components are currently available only from a single source or from limited sources. We may experience delays in production of the AuraGen® if we fail to identify alternate vendors or if any parts supply is interrupted or reduced, or if there is a significant increase in production costs or decline in component quality.

We will need to renew sources of supply to meet increases in demand for the AuraGen®.

We purchased the basic components for the AuraGen® units currently being sold under a bulk order placed prior to fiscal 2001. Due to sales not meeting anticipated levels, we have been selling from this inventory. In order to renew this inventory, we will need to renew contracts with such manufacturers or locate other suitable manufacturers. Although we believe that there are a number of potential manufacturers of the components, we cannot assure you that renewed contracts for components can be obtained on favorable terms. Any material adverse change in such contracts could increase our cost of goods.

Risks Relating to Our Common Stock

Because our operating results have been uneven and may continue to fluctuate, this could affect our stock price.

Because our efforts since 1999 have been focused entirely on the introduction of the AuraGen® family of products into the marketplace, our revenues and operating results have been uneven and may continue to be so during our

current fiscal year and beyond. These fluctuations could affect our stock price. Factors which could affect our operating results include:

- The size, timing and shipment of individual orders;

- Market acceptance of our products;

- Development of direct and indirect sales channels; and

- The timing of introduction of new products or enhancements.

We may issue additional shares of our authorized common stock without obtaining the approval of our stockholders.

As of the date of this report, our corporate charter currently authorizes our Board of Directors to issue up to 75,000,000 shares of common stock, of which 53,703,207 shares were outstanding as of May 17, 2010. The power of the Board of Directors to issue authorized shares of common stock is generally not subject to stockholder approval under Delaware state law, the state of our corporate organization. Any additional issuance of our common stock may have the effect of further diluting the equity interest of stockholders, and such dilution could be substantial.

Because our common stock is subject to rules governing low priced securities, market liquidity for our common stock could be adversely impacted.

Our common stock trades below $5.00 per share and is not listed on the Nasdaq Stock Market or a national or regional securities exchange. Therefore, our common stock is subject to the low priced security or so-called “penny stock” rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. For any transaction involving a penny stock, unless exempt, the rules require, among other things, the delivery, prior to the transaction, of a disclosure schedule required by the SEC relating to the penny stock market. These rules also require that the broker determine, based upon information obtained from the investor, that transactions in penny stocks are suitable for the investor, and require the broker to obtain the written consent of the investor prior to effecting the penny stock transaction. The broker-dealer must also disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. As long as our common stock is characterized as a penny stock, the market liquidity for these shares could be severely affected. The regulations relating to penny stocks could limit the ability of broker-dealers to sell these securities and, in turn, the ability of stockholders to sell their shares in the secondary market.

The potential exercise of outstanding warrants and options could adversely affect the market price of our common stock, dilute the holdings of existing stockholders and impede our ability to obtain additional equity financing.

As of May 17, 2010, we had outstanding 12,496,293 options and warrants to purchase our common stock at exercise prices ranging between $1.50 and $4.00. If those option and warrant holders exercise these securities, we will be obligated to issue additional shares of common stock at the stated exercise price. As of May 17, 2010, the closing price of our common stock was $0.83 per share. The existence of such rights to acquire common stock at fixed prices may prove a hindrance to our efforts to raise future equity funding, and the exercise of such rights will dilute the percentage ownership interest of our stockholders and may dilute the value of their ownership. Future sale of shares issuable on the exercise of outstanding warrants and options at fixed prices below prevailing market prices, or expectations of such sales, could adversely affect the prevailing market price of our common stock, particularly since such warrants or options may be exercised at a fixed price and resold. Further, the holders of the outstanding warrants may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

We do not expect to pay dividends on our common stock in the foreseeable future.

Although our stockholders may receive dividends if, as and when declared by our Board of Directors, we do not presently intend to pay dividends on our common stock until we are able to generate revenues and profits on a

sustained basis and available cash exceeds our working capital requirements. Therefore, you should not purchase our common stock if you need immediate or future income by way of dividends from your investment.

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material pending legal proceedings.

ITEM 4. Not Applicable

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our shares are listed on the OTC Bulletin Board under the symbol “AUSI”. Set forth below are high and low bid prices for our common stock for each quarterly period in the two most recent fiscal years. Such quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions in the common stock. We had 5,949 stockholders of record as May 17, 2010.

Period	High	Low
------	-----	-----
Fiscal 2010
First Quarter ended May 31, 2009	$1.25	$0.85
Second Quarter ended August 31, 2009	$1.05	$0.85
Third Quarter ended November 30, 2009	$0.90	$0.61
Fourth Quarter ended February 28, 2010	$0.95	$0.58

Period	High	Low
------	-----	-----
Fiscal 2009
First Quarter ended May 31, 2008	$1.80	$1.01
Second Quarter ended August 31, 2008	$1.30	$1.03
Third Quarter ended November 30, 2008	$1.30	$0.40
Fourth Quarter ended February 28, 2009	$1.00	$0.36

On May 17, 2010, the reported closing sales price for our common stock was $0.83.

Dividend Policy

We have not paid any dividends on our common stock and we do not anticipate paying any dividends on our common stock in the foreseeable future.

Sales of Unregistered Securities

In the year ended February 28, 2010, we issued 3,305,734 shares of common stock, with 833,721 five year warrants attached with exercise prices ranging from $0.75-$1.25, for cash proceeds of $2,104,400; 94,428 shares were issued upon the exercise of warrants for total consideration of $94,428; 844,566 shares were issued upon the conversion of $569,982 of notes payable and accrued interest; 161,082 shares were issued in settlement of $113,865 of accounts payable; 1,361,667 shares were issued for services valued at $937,009; 300,000 shares were issued to a former employee for the settlement of $294,587 of amounts owed, 151,814 shares were issued for purchase of inventory; and 125,000 shares were issued as an adjustment to the price of a previous issuance of stock.There are no other obligations to provide a price adjustment on any issuances of stock. All such securities were issued and sold in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, and the certificates representing such securities contain a restrictive legend reflecting the limitations on future transfer of those securities. The offer and sale of these securities was made without public solicitation or advertising. The investors represented to us that they were knowledgeable and sophisticated, and were experienced in business and financial matters so as to be capable of evaluating an investment in our securities and were an “accredited investor” within the meaning of Regulation D promulgated under the Securities Act of 1933. Each of these investors was afforded full access to information regarding our business.

Repurchases of Equity Securities

We did not repurchase any shares of our common stock during the fourth quarter of fiscal 2010.

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

Forward Looking Statements.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes many forward-looking statements. For cautions about relying on such forward looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately prior to “Item 1”.

Overview

We design, assemble and sell the AuraGen®, our patented mobile power generator that uses the engine of a vehicle or any other prime mover 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 in numerous industries, including transport refrigeration, hybrid vans, recreational, utilities, telecommunications, emergency/rescue, public works, catering, oil and gas, transportation, government and the military.

We have not yet achieved a level of AuraGen® sales sufficient to generate positive cash flow. Accordingly, we have depended on repeated infusions of cash in order to maintain liquidity as we have sought to develop sales. During fiscal 2002 through fiscal 2004, we substantially reduced our internal staffing due to the slower-than-anticipated level of AuraGen® sales. We also suspended substantially all research and development activities. We continued to downscale our operations in fiscal 2005 and 2006. We filed for protection under Chapter 11 of the U.S. Bankruptcy Code in June 2005 and emerged from Chapter 11 on January 31, 2006, under a plan of reorganization. Since emerging from the Chapter 11 proceeding, we have begun to increase our research and development activities and started to increase our staff in engineering and sales.

feet with several truck service bays and a small amount of office space. The facility was to be used by Aura for warehousing, service, and installation of the AuraGen for customers in the southeastern United States. Due to the national economic down turn, and in particular the uncertainties in the real estate market, the purchase of the facility was put on indefinite hold, and Aura rented the facility on a month-to-month basis for $7,000 per month. Mr. Joseph Dickman, Emerald’s President, joined Aura as Senior Vice President of sales for OEM applications. In December 2009, we terminated our lease arrangements with Emerald, settled all outstanding balances, moved into a new 8,000 square facility in McDonough Georgia and terminated our relationship with Mr. Dickman.

In March 2010, we entered into a strategic alliance with Zanotti of North America. Zanotti is a 50-year-old Italian company specializing in refrigeration for the food industry with distribution in over 70 countries. The strategic alliance consists of Zanotti providing to Aura all electric transport refrigeration systems that will support both the midsize trucks and refrigeration trailers. All of Zanotti’s North America dealers (currently approximately 70) will provide service and installation for Aura’s all-electric transport refrigeration solution (“AETRU”). The alliance also calls for Aura to exclusively use only Zanotti’s refrigeration systems and in return, Zanotti, directly or through its dealer network, is required to generate sales of no less than 1,000 systems of Aura’s AETRU during the first 24 months of the agreement and thereafter no less than 750 systems per year in order to maintain its’ exclusitvity. In addition Zanotti North America agreed to provide Aura with a credit facility for the purchase of the refrigeration systems. Currently the parties are working closely on optimizing the AETRU packages as well as on a joint marketing plan. Deliveries of the Aura/Zanotti AETRU are expected to start in June 2010.

In February 2009 we entered into an exclusive distribution and supply agreement with WePower a Wind-Turbine company. Under the agreement Aura will exclusively provide its generators globally for wind energy harvesting applications to WePower, and in return Aura will be the exclusive supplier of generators to WePower for their wind-turbines. The agreement required WePower to purchase from Aura a minimum of 3,000 systems per year. The domestic as well as the global economic recession has caused significant slowdown in demand for small wind turbines and WePower, like others in its industry, has drastically revised downward their forecast from 3,000 annual units to less than 700 systems per year. The delivery of the initial order for 700 systems has been extended to 2011. In order to meet the WePower requirements we have to customize the AuraGen by changing the number of poles in the machine to allow for lower RPM power generation. Aura is yet to perform this required customization, which involves changing the winding on the stators. We anticipate the completion of the customization during the third quarter of fiscal 2011 and expect to begin delivery of systems to WePower during the current fiscal year.

Our consolidated 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.

Our ability to continue as a going concern is dependent upon the successful achievement of profitable operations and the ability to generate sufficient cash from operations and obtain financing sources 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 - 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.

Because of our historical net losses and negative working capital position, our independent auditors, in their report on our consolidated financial statements for the year ended February 28, 2010 expressed substantial doubt about our ability to continue as a going concern.

Critical Accounting Policies and Estimates

Our management’s 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

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 collect-ability 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.

Terms of our sales generally provide for Shipment from our facilities to customers FOB point of shipment. Title passes to customers at the time the products leave our warehouse.

The Company does not offer a general right of return on any of its sales and considers all sales as final. However, if a customer determines that a different system configuration would better suit their application, we will allow them to exchange the system and bill them the incremental cost, or credit them if there is a decrease in the system cost. While some sales are for evaluative purposes, they are still considered final sales. The customers’ evaluation is for them to determine if there is a benefit to them to outfit additional vehicles in their fleets.

The only potential post delivery obligation the Company might have is for the installation of the unit. However, the unit is typically delivered at the time of installation, and the billing is done when the installation is complete. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing. The Company does not utilize bill and hold. The Company does provide customers with a warranty; however, due to the low sales volume to date, the amount has not been material and is expensed as incurred.

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, on a standard cost basis. 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 it expects 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 or if significant discounts from current pricing levels are granted to generate sales, 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 small 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 realize-ability of the asset. Factors that could trigger a review include significant changes in the manner of an asset's use or our overall strategy.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”, which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair value based method and the recording of such expense in the consolidated statements of operations.

The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with FASB ASC 505-50, “Equity Based Payments to Non-Employees”, whereas the fair value of the equity based compensation is based upon the measurement date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

For the past several years and in accordance with established public company accounting practice, the Company has consistently utilized the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily to management, employees, and directors. The Black-Scholes option-pricing model is a widely-accepted method of valuation that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances.

Research and Development

Research and development costs are expensed as incurred.

Specific asset categories are treated as follows:

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

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

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.

Results of Operations

Fiscal 2010 compared to Fiscal 2009

Revenues

Net revenues in fiscal 2010 increased $799,263 to $3,214,792 from $2,415,529 in fiscal 2009, an increase of 33%. The increase is primarily attributable to increased sales to our customers in the refrigeration truck area, an increase in sales on our long-term contract for units for use on military vehicles in South Korea, and an increase in shipments under our long-term contract with the U.S. Coast Guard.

Cost of Goods

Cost of goods sold in fiscal 2010 increased $205,122 to $1,745,107 from $1,539,985 in fiscal 2007. As a percentage of net revenues, cost of goods sold decreased to 54% in fiscal 2010 from 64% in fiscal 2009. The decrease is attributable to the variation in the mix of products sold. Dual-VIPER units that were shipped to the U.S. Coast Guard carry a higher gross margin than basic 5Kw systems.

Engineering, Research and Development

Engineering, research and development costs increased $388,279 to $2,260,962 in fiscal 2010 from $1,872,683 in fiscal 2009. The increase is attributable to an increase in the number of employees resulting in higher payroll and payroll related costs. Additionally, the Company continued to increase expenditures in the product development area related to the Tangen, the 200 amp ECU and the eight inch generator. .

Selling, General and Administrative Expense

Selling, general and administrative expenses increased $576,788 to $8,386,767 in fiscal 2010 from $7,809,979 in fiscal 2009. The increase is primarily due to an increase in marketing expenditures partially offset by a decrease in legal expenses.

Stock option compensation expense

Stock option compensation expense increased to $6,209,181 in fiscal 2010 from $377,476 in fiscal 2009, an increase of $5,814,367, as a result of the non-cash charges for the issuance of employee stock options in the current year. During the fiscal 2010, the Board of Directors determined that, in order to provide incentives to its’ employees, it was in the best interest of the company to cancel and replace the outstanding employee options that had been granted. With the employees consent, the company cancelled all outstanding employee options that previously had exercise prices ranging from $2.00 to $3.00, and issued new options with an exercise price of $1.50. Employees were given credit towards the three year vesting period extending from the date of their original hire.

Non-Operating Income and Expenses

Net interest expense decreased to $683,561 in fiscal 2010 from $702,650 in fiscal 2009. The decrease is due primarily to a decrease in the interest on the secured notes payable, which were converted into stock in the third quarter of fiscal 2009, partially offset by increased interest expense on the higher level of notes payable owed to a member of our board in the current fiscal year.

Net Income/Loss

Our net loss in fiscal 2010 increased to $16,092,777 from $9,843,962 in fiscal 2009, an increase of $6,248,815. The increase is primarily a result of the increased stock option expense of $6,209,181 as noted above.

Fiscal 2009 compared to Fiscal 2008

Revenues

Net revenues in fiscal 2009 decreased $433,802 to $2,415,529 from $2,849,331 in fiscal 2008, a decrease of 15%. The decrease is attributable to normal sales fluctuations period to period due to our relatively small sales volume and new customer base, and the poor economic climate which caused some of our customers to delay delivery of some product into fiscal 2010.

Cost of Goods

Cost of goods sold in fiscal 2009 decreased $206,376 to $1,539,985from $1,746,361 in fiscal 2008. As a percentage of net revenues, cost of goods sold increased to 64 % in fiscal 2009 from 61% in fiscal 2008. The increase is attributable to the variation in the mix of products sold. Refrigeration systems are comprised of a larger amount of non-Aura manufactured components, which carry a lower gross margin at the resale level.

Engineering, Research and Development

Engineering, research and development costs increased $331,066 to $ 1,872,683 in fiscal 2009 from $1,541,617 in fiscal 2008. The increase is primarily attributable to increased rent of approximately $380,000 relating to the Georgia facility we began using in June of 2008, and the new facility in El Segundo, California, which began in May of 2008, partially offset by a reduction in the use of outside consultants of approximately $100,000.

Selling, General and Administrative Expense

Selling, general and administrative increased $1,237,343 to $7,827,317 in fiscal 2009 from $6,589,974 in fiscal 2008. The increase is due to an increase in compensation expense of approximately $1,200,000 including increases in employee related expenses such as health insurance and payroll taxes of approximately $180,000.

Stock option compensation expense

Stock option compensation expense decreased $1,279,363 to $377,476 from $1,656,838 in the prior year. A majority of the options that were granted in the prior fiscal year vested in that period, and therefore were expensed in fiscal 2009.

Non-Operating Income and Expense

Net interest expense increased $534,043 to $702,650 in fiscal 2009 from $168,607 in fiscal 2009. The increase is attributable to a higher level of debt owing to a Board member, which increased from $500,000 at the end of fiscal 2008 to $2,300,000 at the end of fiscal 2009. Additionally, the 7% convertible notes were outstanding for the entire fiscal 2009 year, compared to only two months in fiscal 2008.

Net Income/Loss

Our net loss increased $883,476 to $9,843,962 in fiscal 2009 from $8,960,486 in fiscal 2008 as a result of our increase in costs associated with the Georgia facility, our new El Segundo facility, and increased compensation and related costs.

Liquidity and Capital Resources

In fiscal 2010, we incurred losses of $16.1 million (including $6,209,181 non cash expenses attributed to employee stock option plan as described above) and had negative cash flows from operations of $6.3 million. In order to fund our cash needs we raised $2.1 million from the sale of our stock in private placements and $.1 million from the exercise of outstanding warrants. We also borrowed $807,500 in short term notes from individuals, with interest rates of 10%, of which $485,000 was subsequently converted into our common stock in fiscal 2010. Additionally, during fiscal 2010, we received periodic advances from a Board member totaling $3.35 million. These advances

carry an interest rate of 10% and are due on demand. As of February 28, 2010, the total amount owing to this Board member is $5.15 million plus accrued interest of $453,199. If the Board member were to demand repayment, we do not currently have the resources to make the payment. Accrued expenses include $494,830 of accrued interest and $1,050,577 of accrued wages that has not been paid to certain employees of the Company.

At February 28, 2010, we had cash of approximately $.05 million, compared to approximately $0.30 million at February 28, 2009. Working capital at February 28, 2010 was a negative $7.3 million as compared to a negative $2.2 million at the end of the prior fiscal year. Accrued expenses increased $1.2 million due primarily to an increase in accrued payroll as a result of certain employees having pay withheld due to a lack of resources. At February 28, 2010, we had accounts receivable, net of allowance for doubtful accounts, of approximately $300,000 compared to approximately $300,000 at February 28, 2009. In fiscal 2010 we acquired property and equipment at a cost of approximately $340,000 including upgrading our computer system and software. We acquired property and equipment at a cost of approximately $240,000 in fiscal 2009. As of February 28, 2010, we expect to need approximately $200,000 to complete the build-out of the El Segundo facility. During fiscal 2010, we incurred additional debt obligations to one of our Board members in the amount of $3,350,000, with an interest rate of 10%. In the year ended February 28, 2010, we issued 3,305,734 shares of common stock for cash proceeds of $2,104,400; 94,128 shares were issued upon the exercise of warrants for total consideration of $94,428; 844,566 shares were issued upon the conversion of $569,982of notes payable and accrued interest; 161,082 shares were issued in settlement of $113,865 of accounts payable; 1,361,667 shares were issued for services valued at $937,010; 300,000 shares were issued to a former employee for the settlement of $294,587 of amounts owed; and 125,000 shares were issued as a one time adjustment to the price of a previous issuance of stock. There are no other obligations to provide a price adjustment on any issuances of stock.

In the year ended February 28, 2009, we issued 2,915,000 shares of common stock for cash proceeds of $2,437,057 and collected subscription receivables of $677,255.In addition, 2,397,137 shares were issued upon the exercise of warrants for total consideration of $2,282,405; 400,000 shares of common stock were issued for the acquisition of $400,000 worth of inventory and supplies in connection with the acquisition of the refrigeration assets of Emerald Commercial Leasing; 430,329 shares of common stock were issued for the exercise of warrants in lieu of payments on our secured notes payable; 100,000 shares of common stock were issued pursuant to an employment agreement we entered into with our Vice President; 2,069,742 shares of common stock were issued upon the conversion of $2,069,742 of secured notes payable and associated accrued interest; 98,442 shares of common stock were issued in settlement of $98,442 of accounts payable; and 150,000 shares of common stock were issued as fees to members of our Board of Directors for a loan and associated loan guarantees by the Board members. Shares issued for non-cash consideration were valued pursuant to EITF 98-15. The Company recorded a gain on settlement of debt of $32,820 and $6,742, respectively for the stock issued for settlement of accounts payable of $98,442 and for stock issued for interest settlement of notes.

The national economic slowdown has resulted in numerous delays and cancellations in acquisitions of new equipment, tools and vehicles as well as delays in upgrades of existing equipment and vehicles. At the same time, the economic conditions have created an environment where users are open to discussions and evaluations of equipment that could result in operational savings. In addition, numerous new environmental related rules and regulations that went into effect during 2009 established an atmosphere where users are looking for innovative solutions to address the new regulations as well as new business opportunities. The above conditions may have a significant impact on our planning and business in fiscal 2011 and beyond.

We have seen a major slow down in during most of fiscal 2010. This was in the form of a slow down in delivery schedules for existing contracts and a significant slowdown in new contracts. Almost a million and half dollars in commercial deliveries on existing contracts during the second half of fiscal 2010 were pushed into fiscal 2011. Similarly, approximately $1.5 million of a military related program approved by Congress in September of 2008 and 2009 has been delayed and moved into the second quarter of fiscal 2011.

During the next twelve months we intend on expanding our AuraGen/Viper business both domestically and internationally. There are four major components necessary to execute a significantly expanding business; (i) augmentation of management and staff, (ii) purchase orders, (iii) facilities and equipment, and (iv) working capital.

We recently hired a new president who is assuming the responsibility for Chief Operating Officer. We have also very recently added two senior people (PhDs) to our technical staff, and a new Vice President of Sales. We plan to add senior quality assurance and quality control staff as well as a number of mechanical and electrical engineers, a

number of technicians and a number of test engineers. We plan to add approximately 10 people to our staff in fiscal 2011.

While no assurances can be given, we developed a business model for fiscal 2011 that projects over $22 million of business. The projections are based on approximately $11 million for transport refrigeration, applications,, approximately $6.0 million for military applications , and estimates of additionally, $5.0 million is projected for numerous industrial and OEM applications.

In order to achieve the planned results we will need sufficient working capital for (i) daily operations, (ii) purchase of raw materials and subassemblies, (iii) purchase of the required equipment, and (iv) supporting cash flow. Our cash flow analysis is based on certain assumptions that include 45 days for collection of account receivables after shipment, 30 day terms for accounts payable to vendors and suppliers, and all monthly operational costs paid during the month in which they are incurred. Based on our business model and projections, as well as historical costs for COGS and other expenses, we determined that the Company will need to raise approximately $10 million in new capital. This would allow us to fund ongoing operations but would not necessarily allow us to pay back our existing debt or deferred payroll. We plan to raise the required capital through the private placement of equity ,convertible debt or straight debt. As such in January 2010 we retained Cappello Capital Corp. as our exclusive financial advisor to assist with our financial needs. Currently, a number of possible parties have shown an interest in investing in the Company but no agreements have been reached as of yet.

We are selling systems for all of the applications currently identified in our business model for fiscal 2011. In addition, we are also in the process of enhancing our product line to address an even larger market segment. We currently provide 5 kW, 8.5 kW and 16 kW solutions and we plan to introduce during the next twelve months 4kW, 12 kW, 25 kW and 50 kW solutions. While there can be no assurances given that we will complete all the developments described above and be able to commercialize them in the planned time, our business model for fiscal 2011 does not contemplate sales for any product currently not available.

Since 2002 substantially all of our revenues from operations have been derived from sales of the AuraGen®. The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will be sufficient to fund working capital needs. In June 2005 we were forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code, from which we emerged under a court-approved plan of reorganization in January 2006.

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 and require additional debt or equity financing to fund ongoing operations. Currently, we have no binding commitments from third parties to provide financing and we cannot assure you that financing will be available at the times or in the amounts required. The issuance of additional shares of equity in connection with such financing could dilute the interests of our existing stockholders, and such dilution could be substantial. If we cannot raise needed funds, we would also be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Consolidated Financial Statements at page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the specified time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of February 28, 2010.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended February 28, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The Company does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of February 28, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework . Based on this assessment, and on those criteria, management concluded that the Company’s internal control over financial reporting was effective as of February 28, 2010.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

ITEM 9B. OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors

The following table sets forth our directors and executive officers, their age, and the office they hold.

Name	Age	Title

Directors

Melvin Gagerman	67	Chairman, Director, Chief Executive Officer, Chief Financial Officer and President
Arthur J. Schwartz, PhD	62	Director, Chief Technical Officer
Dr. Maurice Zeitlin	68	Director, Chairman - Nominating Committee; member, Compensation Committee and Audit Committee
Warren Breslow	67	Director, Chairman - Audit Committee; member, Nominating Committee and Compensation Committee
Salvador Diaz-Verson, Jr.	55	Director, Chairman, Compensation Committee; member, Audit Committee and Nominating Committee

Other Executive Officers

Don Macleod	52	President
Yedidia Cohen	54	Vice President of Engineering

The following sets forth certain information with respect to our directors and executive officers.

Melvin Gagerman - Mr. Gagerman has been the CEO and CFO of the Company since we emerged from Chapter 11 proceedings on January 31, 2006. He has many years of experience in all aspects of managing companies and a very strong background in accounting and finance. Mr. Gagerman was the President of Hollywood Trading Co., a distributor of novelty items, from 2000 until February 2006, when he became CEO of the Company. Prior to that Mr. Gagerman was the CEO of Surface Protection Industries from 1976 to 1977, where he successfully reorganized key management positions; established relationships with new distributors and upgraded manufacturing abilities, developed aggressive marketing programs to revitalize mature product lines and identified new market opportunities to increase sales and profits. From 1973 to 1975 Mr. Gagerman was the Chairman and CEO of Applause, where he successfully reorganized a world famous designer, manufacturer and distributor of licensed and generic stuffed toys which had sales of $137 million per year, 700 employees and losses of 12 million dollars a year. By aggressively altering product lines, adding new lines, cutting overhead, restructuring several key management positions, the company produced a $4.5 million profit within one year. Mr. Gagerman has also served as Managing Partner of Good, Gagerman & Berns, an accounting firm, National Audit Partner for Laventhol and Horwath and Audit Supervisor at Coopers and Lybrand.

Arthur J. Schwartz, PhD – Dr. Schwartz has been CTO and a director of the Company since it emerged from Chapter 11 proceedings on January 31, 2006. From 2002 to 2006 Dr. Schwartz was a principal in the business consulting firm Aries Group Ltd. Dr. Schwartz is one of the founders of the Company and was a member of Aura’s management from1987 until 2002 as Executive Vice President, CTO and director. Dr. Schwartz has been has been involved in all technical aspects of the Company and has been instrumental in many of our government programs. Prior to founding Aura, Dr. Schwartz worked at Hughes Aircraft Company as a senior scientist on classified programs. Dr. Schwartz has a Ph.D in Physics.

Dr. Maurice Zeitlin - Dr. Maurice Zeitlin has been a director of the Company since it emerged from Chapter 11 proceedings on January 31, 2006. Since 1985, Dr Zeitlin has been the President and owner of Maurice A. Zeitlin M.D., a Medical Corporation. He currently practices administrative medicine and is the medical director for several Los Angeles area hospitals. Dr. Zeitlin was a Major in the USAF from 1972 until 1974 He attended the University of Chicago and received his M.D in 1967.

Warren Breslow - Mr. Breslow has been a director and Chairman of the Audit Committee since it emerged from Chapter 11 bankruptcy proceedings on January 31, 2006. Mr. Breslow is the General Partner and Chief Financial Officer of Goldrich & Kest Industries (“G & K Industries”), a property management firm. He joined G & K Industries in 1972 as controller and assumed his current position as General Partner and Chief Financial Officer in 1974. As General Partner and Chief Financial Officer of G & K, Mr. Breslow oversees the financial aspects of G & K’s construction activity, as well as their management operations and information systems center. He is also past president and lifetime member of the board of directors of the Stephen S. Wise Temple, and supports numerous charitable and civic organizations. Prior to his association with Goldrich & Kest Industries, Mr. Breslow was a manager with the International Accounting firm of Laventhol & Horwath. He is a CPA and graduated from the Bernard Baruch School of Business Administration.

Salvador Diaz-Verson, Jr. is a director of the Company and has served in this capacity since June, 2007. He previously served as a director of the Company from 1997 to 2005. Mr. Diaz-Verson is the founder, Chairman and President of Diaz-Verson Capital Investments, Inc., an Investment Adviser registered with the SEC, where he has served since 1991. 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 AFLAC Inc., from 1976 through 1991. 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. Since 1992, Mr. Diaz-Verson has also been a member of the Board of Trustees of the Christopher Columbus Fellowship Foundation, appointed by President George H.W. Bush in 1992, and re-appointed by President Clinton in early 2000. Mr. Diaz-Verson is a graduate of Florida State University.

Don Macleod – Mr. Macleod has served as President of the Company since April 2009. Dr. Macleod previously served as an Executive Director of Seagate Technology where he was responsible for motor design, manufacturing development and production line transfer to manufacturing locations. He has also held Executive Director level positions at Seagate in advanced concepts, media engineering and business process development. Prior to joining Seagate in 1986, Dr. Macleod served as VP of Engineering and a member of the board of directors at Applied Motion Products. Dr. Macleod has been named on 31 U.S. patents, published eight papers on motor technology at international conferences, and led the development of motor technology for disc drives. Dr. Macleod earned his Ph.D. in electrical engineering at the University of Leeds in the UK.

Yedidia Cohen – Mr. Cohen has been employed by us since July, 2001, developing numerous magnetic applications, and has been our VP of Engineering since May, 2006. Prior to being appointed VP of Engineering he was the lead engineer on the AuraGen mechanical tasks. Mr. Cohen has extensive experience in designing and building highly reliable and durable weapon systems. He spent much of his professional carrier at Raphael (Weapon development and testing facility for the Israeli Army). In addition to his vast experience in weapon systems, Mr. Cohen worked for Electric Power Corporation in Haifa, Israel, where he specialized in conceptual design of power generation plane, thermodynamic calculations, design of boilers, pressure vessels and heat exchangers. In addition to his engineering skills Mr. Cohen has experience in building and managing teams of engineers working on complex tasks. Mr. Cohen has a M.S.E.E degree in Mechanical Engineering from the Technion in Haifa, Israel.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires our 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. During the year ended February 28, 2010, Warren Breslow, a director, was granted options to purchase 1,300,000 shares of common stock for which he failed to file a Form 4, Maurice Zeitlin, a director, was granted options to purchase 300,000 shares of common stock for which he failed to file a Form 4, Salvador Diaz-Verson was granted options to purchase 300,000 shares of common stock for which he failed to file a Form 4 and Arthur Schwartz, a director, surrendered 150,000 options and was granted 900,000 options for which he failed to file a Form 4.

Code of Ethics

We have a Code of Ethics for all of our employees, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer. The purpose of the Code is to ensure that our business is conducted in a consistently legal and ethical matter. A copy of our Code of Ethics is included as an exhibit to this Annual Report on Form 10-K.

Audit Committee

The Audit Committee of our Board of Directors recommends selection of independent public accountants to our Board, reviews the scope and results of the year-end audit with management and the independent auditors, reviews our accounting principles and our system of internal accounting controls and reviews our annual and quarterly reports before filing with the SEC. The current members of the Audit Committee are Warren Breslow, (Chairman), Dr. Maurice Zeitlin and Salvador Diaz-Verson. Our Board has determined that all members of the Audit Committee are “independent” under the rules of the SEC and the listing standards of NASDAQ. Our Board also determined that Mr. Breslow is an “audit committee financial expert” in accordance with applicable SEC regulations. The Audit Committee has adopted a written Audit Committee charter.

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes all compensation earned for the fiscal years ended February 28, 2010, and 2009, to the individual who served as our chief executive officer during fiscal 2010, and the two other most highly compensated executive officers who were serving in such capacity as of February 28, 2010 (the "named executive officers").

2010 Summary Compensation Table

Name and Principal Position	Fiscal Year	Salary ($)	Option Awards ($) (2)	Non-Equity Incentive Plan Compensation	All Other Compensation ($)	Total ($)

Melvin Gagerman (1) (6)	2010	360,000	1,047,679	-	26,781(4)	1,434,460
Chief Executive Officer, Chief Financial Officer	2009	360,000	-	-	46,863(4)	406,863
Arthur J. Schwartz(6)	2010	180,000	559,457	-	2,326(5)	741,783
Chief Technical Officer	2009	180,000	-	-	3,420(5)	183,420
Don Macleod President(4)	2010	248,000	64,203	-	-	312,203

(1)	Mr. Gagerman was elected Chairman and Chief Financial Officer effective February 1, 2006 and was elected President and Chief Executive Officer effective May 25, 2006.

(2)	Reflects the fair market value amount at the date of grant using the assumptions set forth in Note 9 to the financial statements included elsewhere in this Annual Report.

(3)	Mr. Macleod was appointed president in April 2009, with a base salary of $25,000 per month.

(4)	Represents automobile and country club dues allowances, the cost of life insurance premiums, and medical expense reimbursements.

(5)	Represents Company matching contributions to the 401(k) plan.

(6)

During fiscal 2010, 1,400,000 five year options were granted to Melvin Gagerman and 900,000 five year options were granted to Arthur Schwartz, In exchange, 1,400,000 options previously issued to Melvin Gagerman and 150,000 options previously issued to Arthur Schwartz, which had an expiration date of February 28, 2012 and an exercise price of $2.00 - $3.00, were cancelled. The new options carry an exercise price of $1.50 and expire in June of 2014. In accordance with FASB ASC 718, the Company accounted for this transaction as a modification. Accordingly, the incremental compensation cost resulting from this modification was calculated as the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The fair values were calculated using the Black-Scholes option pricing. Assumptions used for the modified award were a risk free rate of return of 3.23%, volatility of 141.61%, a dividend yield of 0%, and an expected life of 5 years. Assumptions used for the original awards immediately before they were modified were risk free rates of return of ranging from 1.75% to 2.5%, volatility of 141.61%, a dividend yield of 0%, and expected lives ranging from 2.75 to 4 years.

No bonuses or stock awards were granted to the above individuals for the 2010 or 2009 fiscal years.

Outstanding Equity Awards at 2010 Fiscal Year-End

The following table summarizes certain information regarding the number and value of all options to purchase our common stock held by the individuals named in the Summary Compensation Table at February 28, 2010. No stock awards or equity incentive plan awards were issued or outstanding during fiscal 2010.

2010 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

	Option Awards
	Number of Securities Underlying Unexercised Options (#)	Number of Securities Underlying Unexercised Options (#)	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)	Option Expiration Date
Name	Exercisable	Un-exercisable		Option Exercise Price ($)


Melvin Gagerman	1,400,000	0	--	$1.50	6/18/14
Don Macleod(a)	77,778	322,222	--	$1.50	4/26/14
Arthur J. Schwartz	900,000	0	--	$1.50	6/18/14
Yedidia Cohen	400,000	0	--	$1.50	6/18/14

(a)	Mr. Macleod’s options vest ratable over a three year period from the date of grant.

Option Exercises and Stock Vesting During 2010

No stock options were exercised during fiscal 2010 by the individuals named in the Summary Compensation Table. No stock awards were issued or outstanding during fiscal 2010.

Employment Contracts, Termination of Employment Contracts and Change in Control Arrangements

Gagerman Employment Agreement

Effective November 1, 2006, we entered into a written employment agreement with Melvin Gagerman (the “Gagerman Agreement”) regarding the terms and conditions of his employment as CEO. The Gagerman Agreement originally was in effect through February 28, 2010, and, commencing March 1, 2007, is automatically extended by an additional year at the beginning of each fiscal year unless we give prior notice of our intent not to extend the agreement. Accordingly, the Gagerman Agreement is currently in effect until February 28, 2014. The agreement may be terminated before its stated expiration by either of the parties under specified terms and conditions Following are the material terms of the Gagerman Agreement.

Base Salary and Annual Bonus.

Mr. Gagerman is entitled to a base salary of $360,000 per year. The Gagerman Agreement also provides for an annual bonus to be approved by the Board of Directors of up to $100,000 based on objective and subjective milestones and, in the case of the 2007 fiscal year, provided the company has the available cash, and an additional annual bonus at the discretion of the Board of Directors of up to $100,000 for achievements in excess of expected milestones. The initial qualitative milestones and their quantitative relative weight were specified in the Gagerman Agreement for fiscal 2007, fiscal 2008 and fiscal 2009, and relate to achievement of specified business, financial and organizational performance goals. The Company may change both the qualitative goals and relative weight of the goals by giving notice to Mr. Gagerman prior to the fiscal quarter that the change will take effect. In addition, we retain the discretion under the Gagerman Agreement to pay an annual bonus regardless of whether the stated milestones are achieved. Bonuses are payable within 45 days after the end of the applicable fiscal year.

Stock Options

The Gagerman Agreement provides for him to receive options to purchase 300,000 shares of common stock at an exercise price of $2.00 per share, of which 50,000 options are designated for tax purposes as “incentive stock options” and the remaining options are non-qualified options. The Gagerman Agreement originally provided for an option term of three years, which was subsequently extended to five years. The options vest at the rate of 25,000 per month. Unvested options vest if the Gagerman Agreement is terminated by either party under specified circumstances. All of these options vested as of November 2007. In addition to the 300,000 options granted under the Gagerman Agreement, Mr. Gagerman has been granted an additional 700,000 options and warrants, described elsewhere in this Report, and remains eligible for future equity compensation awards. In June of 2009, all outstanding options granted to Mr. Gagerman were cancelled with his agreement, and 1,400,000 new five year options exercisable at $1.50 were granted.

Life Insurance, Dues and Car Allowance

The Gagerman Agreement requires us to pay life insurance premiums on his private life insurance policy, up to $7,500 per year. Mr. Gagerman is also entitled to receive $2,000 per month as an automobile allowance and country club dues, and reimbursement of the country club initiation fee of up to $8,000.

Medical Benefits

In addition to health and dental insurance generally available to all of our employees, Mr. Gagerman is also entitled to receive reimbursement of up to $15,000 per year for all non-covered medical and dental expenses for himself and his spouse, including deductibles and co-payments. His agreement also entitles him to reimbursement for the cost of long term care insurance.

Early Termination of Agreement

The Gagerman Agreement provides that either party may terminate the agreement prior to its stated term upon occurrence of the following events:

Death or Permanent Disability – The agreement automatically terminates upon Mr. Gagerman’s death or disability (as determined under our Long-Term Disability Plan, which provides for a benefit of 50% of his monthly salary to a maximum of $6,000 per month).

By the Company For Cause - We may terminate the agreement for “cause”. The agreement defines “cause” to include:

a breach by Mr. Gagerman of his obligations not to compete with us during the term of his employment;

a breach by Mr. Gagerman of his obligation to maintain confidential information

commission of an act of fraud, embezzlement or dishonesty which is injurious to us;

intentional misconduct which is detrimental to our business or reputation

By the Company for Non-Performance – We may terminate the agreement upon 120 days prior notice in the event of “non-performance” by Mr. Gagerman. The agreement defines “non-performance” to mean a determination by not less than 75% of the members of our Board of Directors that Mr. Gagerman is not performing his duties as CEO and the continuation of the non-performance for 15 days after receiving notice of the Board’s determination.

By The Company Without Cause or Non-Performance – We may terminate the agreement upon not less than 12 months notice, without regard to Mr. Gagerman’s performance.

By Mr. Gagerman For Cause – Mr. Gagerman may terminate the agreement for “cause” upon not less than 45 days notice. The agreement defines “cause” to include:

· A change in his job responsibilities resulting from a demotion; and

· His removal as a member of the Board of Directors.

By Mr. Gagerman Without Cause – Mr. Gagerman may terminate the agreement upon not less than 120 days notice without regard to whether we are meeting our obligation under the agreement.

By Mr. Gagerman Upon a Change of Control - Mr. Gagerman may terminate the agreement upon not less than 30 days notice at any time following a “change in control.” The agreement defines change of control to mean:

The acquisition by a new investor of more than 50% of our common stock, or

The change of a majority of our board members either by an individual or by one or more groups acting together.

Severance Benefits Upon Termination

Base Salary and Bonus. Upon the termination of Mr. Gagerman’s employment as CEO, he is entitled to receive accrued salary, unpaid bonus payments (if any) through the effective date of his termination.

Employee Benefits. All employee benefits, including life insurance premiums and automobile and dues allowances, cease to accrue as of the date of termination.

Stock Options – Upon the termination of Mr. Gagerman’s employment as CEO the portion of the 300,000 options which are vested as of the date of termination remain exercisable in accordance with their terms. The unvested portion of the 300,000 options terminate upon termination of the agreement unless:

termination is a result of a “change in control” or

We terminate the agreement other than for “cause” or “non-performance.”

in which case the unvested options become fully exercisable upon termination. All of these options were fully vested as of November 2007.

Lump Sum Severance Payment - Under the terms of the agreement Mr. Gagerman is entitle to a lump sum severance payment within 45 days of termination equal to the greater of one year’s base salary ($360,000), or the unpaid balance of the base salary which would have been payable if Mr. Gagerman remained employed through the stated term of employment in effect immediately prior to the termination if:

termination is a result of a “change in control”

Mr. Gagerman terminates the agreement for “cause” or

We terminate the agreement other than for “cause” or “non-performance.”

Each of these events is referred to as a “severance payment event.”

Macleod Employment Agreement

Dr. Donald Macleod was appointed as President, effective April 27, 2009. Pursuant to a two-year employment agreement between the Company and Dr. Macleod, dated April 20, 2009, Dr. Macleod is entitled to (1) an annual salary of $300,000; (2) an option to purchase up to 400,000 shares of common stock of the Company at a price of $1.50 per share, including a provision for cashless exercise of the options; (3) relocation and recruiting expense reimbursement and; (4) participate in all benefit and bonus programs established by the Company for its executive officers. The stock options granted to Dr. Macleod under his employment agreement vest monthly over a three-year period with 1/36th of the shares vesting monthly until all shares are vested, and provide for earlier vesting under certain circumstances upon termination of Dr. Macleod’s employment other than by the Company for cause or employee without good reason. The stock options have a term of up to five years, subject to earlier termination in the event of the termination of his employment prior to the expiration of the options. The stock options are granted under the Company's 2006 Employee Option Plan and are otherwise subject to the terms and conditions applicable to stock options granted under that plan.

Dr. Macleod may terminate the employment agreement at any time upon written notice. The Company is entitled to terminate the employment agreement prior to the end of the two year term in the event of Dr. Macleod’s death or disability, or for “cause” (as defined in the agreement). If the employment agreement is terminated as a result of Dr. Macleod’s disability, by the Company other than for cause, or by Dr. Macleod for “good reason”, Dr. Macleod is entitled to receive a severance payment equal to six months base salary, payable over six months following his termination.

Potential Payments to the Named Executive Officers Upon Termination or Change in Control

Other than the benefits provided for in Mr. Gagerman’s and Dr. Macleod’s written employment agreement, which are described above, none of the named executive officers are entitled to any payments or benefits upon termination, whether by change in control or otherwise, other than benefits available generally to all employees.

Upon the occurrence of a severance payment event for Mr. Gagerman, assuming he were terminated as of February 28, 2010, he would be entitled to a severance payment of $1,080,000, payable within 45 days of the date of his termination.

Director Compensation During Fiscal 2010

The following table summarizes all compensation paid to directors other than named executive officers during fiscal 2010.

2010 DIRECTOR COMPENSATION TABLE

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($) (1)(2)	Non-Equity Incentive Plan Compensation ($)	All Other Compensation ($)	Total ($)
Maurice Zeitlin (3)	-	-	250,436	-	-	250,436
Warren Breslow (4)	-	-	1,085,223	-	-	1,085,223
Salvador Diaz-Verson, Jr. (5)	-	-	250,436	-	-	250,436

(1)	Reflects the fair market value amount at the date of grant using the assumptions set forth in Note 9 to the financial statements included elsewhere in this Annual Report.

(2)

In fiscal 2010 Messrs. Zeitlin and Diaz-Verson were each granted Director Warrants(options) to acquire 300,000 shares of our common stock at an exercise price of $1.50 per share, and Mr. Breslow was granted 1,300,000 Director Warrants(options) of our common stock at an exercise price of $1.50 per share, being not less than the fair market value on the date of grant, which options vest immediately and expire in June 2014. In fiscal 2008 Messrs. Zeitlin, Breslow and Diaz-Verson were each granted Director Warrants (options) to acquire 25,000 shares, of our common stock at an exercise price of $2.50 per share, respectively, being not less than the fair market value of our common stock on the date of grant, which options vest at a rate of 25% every six months and expire in October 2012.

(3)	The director had 325,000 options outstanding as of February 28, 2010.

(4)	The director had 1,025,000 options outstanding as of February 28, 2010.

(5)	The director had 325,000 options outstanding as of February 28, 2010.

Our Board of Directors may, at its discretion, compensate directors for attending board and committee meetings and reimburse the directors for out-of-pocket expenses incurred in connection with attending such meetings. Our directors are also eligible to receive stock option grants under our 2006 employee stock option plan and Director Warrants authorized under our Chapter 11 Plan of Reorganization.

Compensation Committee Interlocks and Insider Participation

During the 2010 fiscal year our Compensation Committee was comprised of Messrs. Breslow, Diaz-Verson, Jr., and Zeitlin. None of the members of the Compensation Committee was an executive officer or employee of the Company. During the 2010 fiscal year, none of our executive officers served on our Compensation Committee.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, to the extent of our knowledge, certain information regarding our common stock owned as of June 1, 2009 (i) by each person who is known to be the beneficial owner of more than five percent (5%) of our outstanding Common Stock, (ii) by each of our Directors and the named executive officers in the Summary Compensation Table, and (iii) by all Directors and current executive officers as a group:

Beneficial Owner	Number of Shares of Common Stock	Percent of Common Stock (1))

ICM Asset Management, Inc. (2)(3)	2,920,915	5.4%
James M. Simmons (2)(4)	2,977,493	5.5%
Koyah Ventures, LLC (2)(5)	2,537,598	4.7%
Melvin Gagerman (6)	1,933,871	3.5%
Arthur Schwartz (7)	1,609,909	2.9%
Maurice Zeitlin (8)	1,428,760	2.7%
Warren Breslow (9)	2,675,878	4.8%
Salvador Diaz-Verson, Jr. (10)	440,934	*
Don Macleod(11)	281,383	*
All current executive officers and Directors as a group (seven)	8,778,698	14.9%

* Less than 1% of outstanding shares.

(1)

Beneficial ownership is determined in accordance with rules of the U.S. Securities and Exchange Commission. The calculation of the percentage of beneficial ownership is based upon 53,703,207 shares of common stock outstanding on May 17, 2010. In computing the number of shares beneficially owned by any shareholder and the percentage ownership of such shareholder, shares of common stock which may be acquired by a such shareholder upon exercise or conversion of warrants or options which are currently exercisable or exercisable within 60 days of May 17, 2010, are deemed to be exercised and outstanding. Such shares, however, are not deemed outstanding for purposes of computing the beneficial ownership percentage of any other person. Shares issuable upon exercise of warrants and options which are subject to shareholder approval are not deemed outstanding for purposes of determining beneficial ownership. Except as indicated by footnote, to our knowledge, the persons named in the table above have the sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

(2)

Number of shares owned is as of December 31, 2009, and is based upon information contained in Schedule 13G jointly filed with the SEC on February 16, 2010, by ICM Asset Management, Inc., Koyah Ventures, LLC, Koyah Leverage Partners, L.P. and James M. Simmons. The business address of these filers is 601 W. Main Avenue, Suite 600, Spokane, Washington 99201. ICM Asset Management, Inc., James M. Simmons and Koyah Ventures, LLC constitute a group sharing beneficial ownership within the meaning of Rule 13d-5(b)(1), but are not part of a group with any other person. Koyah Leverage Partners, L.P. expressly disclaims membership in a group and disclaims beneficial ownership of the common stock covered by the Schedule 13G. ICM Asset Management, Inc. is a registered investment adviser whose clients have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the common stock. James M. Simmons is the Chief Executive Officer and controlling shareholder of ICM Asset Management, Inc. and the manager and controlling owner of Koyah Ventures, LLC. Koyah Ventures, LLC is the general partner of Koyah Leverage Partners, L.P. and other investment limited partnerships of which ICM Asset Management, Inc. is the investment adviser. No individual client of ICM, other than Koyah Leverage Partners, L.P., holds more than five percent of the outstanding common stock.

(3)	Includes sole dispositive and voting power of 862 shares and shared voting and dispositive power of 2,920,053 shares.

(4)	Includes sole dispositive and voting power of 56,578 shares and shared voting and dispositive power of 2,920,915 shares.

(5)	Includes shared voting and dispositive power of these 2,537,598 shares.

(6)	Includes 1,536,329 warrants and options exercisable within 60 days of May 17, 2010.

(7)	Includes 976,183 warrants and options exercisable within 60 days of May 17, 2010.

(8)	Includes 363,692 warrants and options exercisable within 60 days of May 17, 2010.

(9)	Includes 1,311,813 warrants and options exercisable within 60 days of May 17, 2010.

(10)	Includes 373,489 warrants and options exercisable within 60 days of May 17, 2010.

(11)	Includes 133,333 warrants and options exercisable within 60 days of May 17, 2010.

The mailing address for the officers and directors is c/o Aura Systems, Inc., 1310 E. Grand Ave., El Segundo, CA 90245.

Securities Authorized for Issuance Under Equity Compensation Plans as of February 28, 2010

Equity Compensation Plan Information as of February 28, 2010

Number of Securities

Weighted-average

Remaining Available for

Number of Securities to

Exercise Price of

Future Issuance Under Equity

be Issued Upon Exercise

Outstanding

Compensation Plans

of Outstanding Options,

Options, Warrants and Rights

(Excluding Securities Reflected in Column (a))

Plan Category

Warrants and Rights

(a)

(b)

(c)

Equity compensation plans approved by security holders (1)

6,223,500

1.50

Equity compensation plans not approved by security holders (2)

1,975,000

1.50

(1)

Reflects options under the 2006 Stock Option Plan. The 2006 Stock Option Plan authorizes the Company to grant stock options exercisable for up to an aggregate number of shares of common stock equal to the greater of (i) 3,000,000 shares of common stock, or (ii) 10% of the number of shares of common stock outstanding from time to time. The numbers in this table are as of February 28, 2010. In fiscal 2010 the Company inadvertently issued 6,223,500 options, thereby exceeding the limit by 954, 594 shares. Subsequent to February 28, 2010, in order to stay within the plan limits, 1,400,000 plan options were exchanged for non-plan options.

(2)	Reflects warrants issued to Mssrs. Breslow, Zeitlin, and Diaz-Verson, our three outside directors.

For additional information regarding options and warrants, see Note 9 to our financial statements appearing elsewhere in this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Transactions

Since the beginning of the 2010 fiscal year, Mr. Breslow, a director, has made various temporary advances to the Company totaling $4,500,000. The highest amount outstanding at any one time was $6,200,000, and as of May 31, 2010, there was an outstanding balance of $6,200,000. Interest on the advances was at a rate of 10% per annum and totaled $368,033 for the year ended February 28, 2010. As of May 31, 2010, the outstanding accrued interest totaled $ 591,500. No principal or interest was paid to Mr. Breslow in the current fiscal year.

Review and Approval of Related Party Transactions

Our Audit Committee is responsible for the review and approval of all related party transactions required to be disclosed to the public under SEC rules. This procedure, which is contained in the written charter of our Audit Committee, has been established by our Board of Directors in order to serve the interests of our shareholders. Related party transactions are reviewed and approved by the Audit Committee on a case-by-case basis. Under existing, unwritten policy no related party transaction can be approved by the Audit Committee unless it is first determined that the terms of such transaction is on terms no less favorable to us than could be obtained from an unaffiliated third party on an arms-length basis and is otherwise in our best interest.

Director Independence

Our Board is comprised of a majority of independent directors under the rules of the SEC and the listing standards of NASDAQ. Our independent directors are Messrs. Zeitlin, Breslow, and Diaz-Verson. Our Board has determined that each member of the Audit Committee, Compensation Committee and Nominating Committee is independent under such rules and standards. Messrs. Gagerman and Schwartz are not independent directors under applicable SEC rules.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND DISCLOSURES

The Audit Committee regularly reviews and determines whether specific non-audit projects or expenditures with our independent auditors potentially affect their independence. The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent auditors. Pre-approval is generally provided by the Audit Committee for up to one year, as detailed as to the particular service or category of services to be rendered, as is generally subject to a specific budget. The Audit Committee may also pre-approve additional services of specific engagements on a case-by-case basis.

The following table sets forth the aggregate fees billed to us by Kabani & Co. for the years ended February 28, 2010, and February 28, 2009:


	Year Ended February 28,
	2010		2009
Audit Fees(1)	$	82,500	$	90,000
Audit-related fees(2)		-		-
Tax fees(3)		-		5,000
All other fees		-		-

Total	$	82,500	$	95,000


(1)		Included fees for professional services rendered for the audit of our annual financial statements and review of our annual report on Form 10-K and for reviews of the financial statements included in our quarterly reports on Form 10-Q for the first three quarters of the years ended February 28, 2010 and February 28, 2009.
(2)		Includes fees for professional services rendered in connection with our evaluation of internal controls.
(3)		Includes fees for professional services rendered in connection with the preparation of our income tax returns.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The Audit Committee pre-approves all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. During fiscal 2010 and 2009 all services provided by Kabani and Company were pre-approved by the Audit Committee in accordance with this policy.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

INDEX TO EXHIBITS

Description of Documents

2.1	First Amended Plan of Reorganization of Aura Systems, Inc.(2)
3.1	Amended and Restated Certificate of Incorporation of Aura Systems, Inc. (1)
3.2	Amended and Restated Bylaws of Aura Systems, Inc. as amended to date. (1)
10.1	Form of Unsecured Creditor Warrants issued under First Amended Plan of Reorganization of the Company. (3)
10.2	Form of Management Warrants issued under First Amended Plan of Reorganization of Aura Systems, Inc.(3)
10.3	Form of Director Warrants issued under First Amended Plan of Reorganization of t Aura Systems, Inc. (3)
10.4	Aura Systems, Inc. 2006 Stock Option Plan. (3)
10.5	Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement. (3)
10.6	Employment Agreement dated January 4, 2007, by and between the Company and Melvin Gagerman. (3)
10.7	Full Release dated as of January 31, 2006, by Aura Systems, Inc. for the benefit of Koyah Leverage Partners, L.P., Koyah Partners, L.P. Koyah Ventures LLC, Raven Partners, L.P., Koyah Microcap Partners Master Fund, L.P. and James M. Simmons. (3)
10.8	Consolidated, Amended and Restated Security Agreement dated as of January 31, 2006, by Aura Systems, Inc. for the benefit of Koyah Leverage Partners, L.P., Koyah Partners, L.P. Koyah Ventures LLC, Raven Partners, L.P., and Koyah Microcap Partners Master Fund, L.P. (3)
10.9	Consolidated, Amended and Restated Stock Pledge Agreement dated as of January 31, 2006, by Aura Systems, Inc. for the benefit of Koyah Leverage Partners, L.P., Koyah Partners, L.P. Koyah Ventures LLC, Raven Partners, L.P., and Koyah Microcap Partners Master Fund, L.P. (3)
10.10	Amended and Restated Intercreditor Agreement dated as of January 31, 2006, by and among Aura Systems, Inc., Koyah Leverage Partners, L.P., Koyah Partners, L.P. Koyah Ventures LLC, Raven Partners, L.P., and Koyah Microcap Partners Master Fund, L.P. (3)
10.11	Amended and Restated Promissory Note dated January 31, 2006, by Aura Systems, Inc. in favor of Raven Partners, L.P. (3)
10.12	Amended and Restated Promissory Note dated January 31, 2006, by Aura Systems, Inc. in favor of Koyah Ventures, LLC (3)
10.13	Consolidated, Amended and Restated Promissory Note dated January 31, 2006, by Aura Systems, Inc. in favor of Koyah Partners, L.P. (3)
10.14	Consolidated, Amended and Restated Promissory Note dated January 31, 2006, by Aura Systems, Inc. in favor of Koyah Microcap Partners Master Fund, L.P. (3)
10.15	Consolidated, Amended and Restated Promissory Note dated January 31, 2006, by Aura Systems, Inc. in favor of Koyah Leverage Partners, L.P. (3)
10.16	Lease between Aura Systems Inc., and Alliance Commercial Partners (3)
10.17	Lease between Aura Systems Inc., and Derek Lidow as Trustee for the Lidow Family Trust and Alexander Lidow (3)
10.18	Form of 7% Convertible Subordinated Debenture (4)
10.19	Asset Purchase Agreement by and among Aura Systems, Inc. and Emerald Commercial Leasing, Inc. (4)
10.20	Mutual Agreement Ending AuraGen Distributorship Exclusivity between Emerald Commercial Leasing, Inc. and Aura Systems Inc.(4)
10.21	Employment Agreement Dated May 15, 2008, by and between Joseph Dickman and the Company. (4)
10.22	Conversion Agreement dated as of September 1, 2008, by and among Aura Systems, Inc., Koyah Leverage Partners, L.P., Koyah Partners, L.P. Koyah Ventures LLC, and Raven Partners, L.P. (5)
10.23	Distributorship Agreement dated February 27, 2009, by and between Aura Systems, Inc. and WePower LLC. (6)
10.24	Executive Employment Agreement by and between Don Macleod and Aura Systems, Inc.
10.25	Strategic Alliance Agreement dated March 18, 2010, by and between Aura Systems, Inc. and Zanotti East Inc.
10.26	Amended and Restated Distributorship Agreement dated March 19, 2009, by and between Aura Systems, Inc. and WePower LLC
14.1	Code of Ethics (3)
31.1	CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.2	CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. Section 1350

(1)	Incorporated by reference from the Company’s Report on Form 10-K filed with the SEC on June 15, 2009.
(2)	Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on January 20, 2006.
(3)	Incorporated by reference from the Company’s Report on Form 10-K filed with the SEC for the year ended February 28, 2005.
(4)	Incorporated by reference from the Company’s Report on Form 10-K filed with the SEC for the year ended February 29, 2008.
(5)	Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on October 14, 2008
(6)	Incorporated by reference from the Company’s Report on Form 10-K filed with the SEC for the year ended February 28, 2009.

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.

AURA SYSTEMS, INC.

Dated:	June 15, 2010

By:	/s/ Melvin Gagerman
	Melvin Gagerman
	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 and in the capacities and on the date indicated.

Signatures	Title	Date
/s/ Melvin Gagerman	Chief Executive Officer, Acting Chief Financial Officer Director and Chairman of the Board (Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer)	June 15, 2010
Melvin Gagerman		June 15, 2010

/s/ Arthur Schwartz	Director	June 15, 2010
Arthur Schwartz	Director	June 15, 2010

	Director	June 15, 2010
/s/ Maurice Zeitlin	Director	June 15, 2010
Maurice Zeitlin
	Director	June 15 , 2010
/s/ Warren Breslow	Director	June 15 , 2010
Warren Breslow
	Director	June 15, 2010
/s/Salvador Diaz-Verson, Jr.	Director	June 15, 2010
Salvador Diaz-Verson, Jr.
	Director	June 15, 2010
	Director	June 15, 2010

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	F-1

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

Consolidated Balance Sheets - February 28, 2010 and February 28, 2009	F-2
Consolidated Statements of Operations - Years ended February 28, 2010 and February 28, 2009	F-3
Consolidated Statements of Stockholders' Equity/(Deficit) - Years ended February 28, 2010 and February 28, 2009	F-4
Consolidated Statements of Cash Flows - Years ended February 28, 2010 and February 28, 2009	F-5 to F-6
Notes to Consolidated Financial Statements	F-7 to F-20

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Aura Systems, Inc. and subsidiary

We have audited the accompanying consolidated balance sheets of Aura Systems, Inc. (a Delaware corporation) and subsidiary (the “Company”) as of February 28, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the two year period ended February 28, 2010. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 subsidiary as of February 28, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the two year period ended February 28, 2010 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 10 to the financial statements, the Company has historically incurred substantial losses from operations, and the Company may not have sufficient working capital or outside financing available to meet its planned operating activities over the next twelve months. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are described in Note 10. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Kabani & Company, Inc.

Certified Public Accountants

Los Angeles, California

June 15, 2010

F-1

AURA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	February 28, 2010			February 28, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	45,294		$	317,256
Accounts receivable, net of allowance for doubtful accounts of $50,000 and $60,000 at February 28, 2010 and 2009, respectively		313,671			319,249
Inventory - current		1,500,000			1,500,000
Other current assets		241,749			255,620
Total current assets		2,100,714			2,392,125

Property, plant, and equipment, net		557,838			353,444
Inventory, non-current, net of allowance for obsolete inventory of $2,212,626 and $2,425,994 at February 28, 2010 and 2009, respectively		2,140,194			2,545,978

Total assets	$	4,798,746		$	5,291,547

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	1,130,276		$	1,075,202
Notes payable		547,500			225,000
Notes payable- related party		5,150,000			1,800,000
Accrued expenses		2,221,759			1,037,917
Customer advances		411,616			418,612

Total current liabilities		9,461,151			4,556,731

Convertible note payable		500,000			500,000

Total liabilities		9,961,151			5,056,731


Commitments and contingencies


Stockholders' equity (deficit) :
Common stock, $0.0001par value; 75,000,000 and 50,000,000 shares authorized at February 28, 2010 and 2009; 52,689,061 and 46,344,770 issued and outstanding at February 28, 2010 and 2009		5,268			4,634
Additional paid-in capital		374,890,469			364,222,963
Subscription receivable		-			(27,416	)
Accumulated deficit		(380,058,142	)		(363,965,365	)

Total stockholders' equity (deficit)		(5,162,405	)		234,816

Total liabilities and stockholders' equity(deficit)	$	4,798,746		$	5,291,547

The accompanying notes are an integral part of these consolidated financial statements.

F-2

AURA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended February 28, 2010 and 2009

	2010			2009

Net revenues	$	3,214,792		$	2,415,529
Cost of goods sold		1,745,107			1,539,985

Gross profit		1,469,685			875,544

Operating expenses:
Engineering, research and development		2,260,962			1,872,683
Selling, general, and administrative		8,386,767			7,827,317
Stock option and warrants compensation expense		6,209,181			377,476

Total operating expenses		16,856,910			10,077,476

Loss from operations		(15,387,225	)		(9,201,932	)

Other income (expense):
Interest expense, net		(683,561	)		(702,650	)
Gain (Loss) on settlement of debt, net		(43,022	)		39,562
Other income (expense), net		21,031			21,058

Total other expense		(705,552	)		(642,030	)

Net Loss	$	(16,092,777	)	$	(9,843,962	)

Basic and diluted loss per share	$	(0.33	)	$	(0.24	)

*Weighted-average shares outstanding		48,294,414			41,716,958

* Basic and diluted weighted average number of shares outstanding are equivalent because the effect of

dilutive securities is anti-dilutive.

The accompanying notes are an integral part of these consolidated financial statements

F-3

AURA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/ (DEFICIT)

	Common Stock Shares		Common Stock Amount		Additional Paid-In Capital			Subscription Receivable			Accumulated Deficit			Total Stockholders' Equity /(Deficit)

Balance, February 28, 2008		37,783,539	$	3,778	$	355,618,690			(704,671	)	$	(354,121,403	)	$	796,394
Common stock issued in private placements, net		2,915,000		292		2,436,766			585,750			-			3,002,807
Warrants exercised		2,397,717		240		2,282,165			-			-			2,282,405
Shares issued in exchange for assets purchased		400,000		40		399,960			-			-			400,000
Warrants exercised for note settlement		430,329		43		430,286			-			-			430,329
Shares issued for services		100,000		10		99,990			-			-			100,000
Shares issued for note conversion		2,069,742		207		2,069,535			-			-			2,069,742
Shares issued for debt settlement		98,442		9		58,871			-			-			58,880
Shares issued as note guarantee fee		150,000		15		62,985			-			-			63,000
Subscription settled with payable		-		-		-			91,505						91,505
Induced conversion charge		-		-		368,900			-			-			368,900
Employee option expense		-		-		394,814			-			-			394,814
Net Loss		-		-		-			-			(9,843,962	)		(9,843,962	)
Balance, February 28, 2009		46,344,770	$	4,634	$	364,222,963		$	(27,416	)	$	(363,965,365	)	$	234,816

Common stock issued in private placements, net		3,305,734		331		2,104,069			-			-			2,104,400
Warrants exercised		94,428		9		94,419			-			-			94,428
Shares issued for note conversions		844,566		84		569,898			-			-			569,982
Shares issued for settlement of accounts payable		161,082		16		113,849			-			-			113,865
Stock issued for inventory purchase		151,814		15		151,799			-			-			151,814
Shares issued for services		1,361,667		136		936,874			-			-			937,010
Adjustment to prior issuance		125,000		13		(13	)		-			-			-
Shares issued for debt settlement		300,000		30		294,557			-			-			294,587
Warrant discount and beneficial conversion feature		-		-		220,289			-			-			220,289
Employee option and warrant expense		-		-		6,209,181			-			-			6,209,181
Subscription receivable write-off		-		-		(27,416	)		27,416			-			-
Net Loss		-		-		-			-			(16,092,777	)		(16,092,777	)

Balance, February 28, 2010		52,689,061	$	5,268	$	374,890,469			-		$	(380,058,142	)	$	(5,162,405	)

The accompanying notes are an integral part of these consolidated financial statements

F-4

AURA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended February 28, 2010 and 2009

	2010			2009

Cash flows from operating activities:
Net loss	$	(16,092,777	)	$	(9,843,962	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		138,448			78,980
Provision for bad debt		25,650			29,184
Provision for inventory obsolescence		(213,367	)		(298,405	)
Stock option compensation expense		6,209,181			394,814
Stock issued for inventory purchase		151,814			400,000
Amortization of debt discount		220,289			-
Operating expense charged for induced conversion		-			368,900
(Gain) Loss on debt settlement		43,022			(39,562	)
Stock issued for loan guarantee fee		-			63,000
Stock issued for services		937,010			100,000
(Increase) decrease in:
Accounts receivable		(20,072	)		438,621
Inventory		619,149			875,246
Other current assets		13,871			10,564
Increase (decrease) in:
Accounts payable and accrued expenses		1,689,329			1,092,038
Customer advances		(6,996	)		418,612

Net cash used in operating activities		(6,285,449	)		(6,311,970	)

Cash flows from investing activities:
Purchase of property, plant, and equipment		(342,841	)		(238,519	)

(Continued)

The accompanying notes are an integral part of these consolidated financial statements

F-5

AURA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the Years Ended February 28, 2010 and 2009

	2010			2009

Cash flows from financing activities:
Proceeds from notes payable		807,500			350,000
Proceeds from notes payable - related party		3,350,000			1,300,000
Payments on notes payable		-			(125,000	)
Net proceeds from warrants exercised		94,428			2,282,405
Net proceeds from issuance of common stock		2,104,400			3,022,807

Net cash provided by financing activities		6,356,328			6,830,212

Net increase (decrease) in cash and cash equivalents		(271,962	)		279,724
Cash and cash equivalents, beginning of year		317,256			37,532

Cash and cash equivalents, end of year	$	45,294		$	317,256

Supplemental disclosures of cash flow information:
Interest paid	$	34,849		$	578,068

Income taxes paid	$	-		$	-

Supplemental schedule of non-cash financing and investing activities:

During the year ended February 28, 2010, $569,982 of notes payable and accrued interest was converted into 844,566 shares of common stock, $113,865 of accounts payable was converted into 161,082 shares of common stock, 300,000 shares of common stock were issued upon settlement of $294,587 owed to a former employee, subscription receivables of $27,416 were written-off to additional paid-in capital, and 125,000 shares of common stock were issued as a price adjustment to a previous private placement.

During the year ended February 28, 2009, $2,069,743 of notes payable and accrued interest was converted into 2,500,071 shares of common stock, 430,329 shares of common stock were issued upon the exercise of warrants in lieu of payments on notes payable of $430,329, 400,000 shares of common stock were issued in satisfaction of a liability for assets purchased with a value of $400,000, 98,442 shares of common stock were issued in satisfaction of $98,442 of previously recorded liabilities, subscription receivable of $91,505 was settled against previously recorded liability of the same amount.

The accompanying notes are an integral part of these consolidated financial statements

F-6

AURA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2010

NOTE 1 - ORGANIZATION AND OPERATIONS

Aura Systems, Inc., ("Aura", “We” or the "Company") a Delaware corporation, was founded to engage in the development, commercialization, and sales of products, systems, and components, using its patented and proprietary electromagnetic and electro-optical technology. Aura develops and sells AuraGen® mobile induction power systems to the industrial, commercial, and defense mobile power generation markets. In addition, we hold patents for other technologies that have not been commercially exploited.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Aura and our inactive subsidiary, Aura Realty, Inc. Significant inter-company amounts and transactions have been eliminated in consolidation.

Revenue Recognition

Terms of our sales generally provide for Shipment from our facilities to customers FOB point of shipment. Title passes to customers at the time the products leave our warehouse.

Cash and Cash Equivalents

Cash and equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. We maintain cash deposits at a bank located in California. Deposits at this bank are insured by the Federal Deposit Insurance Corporation up to $250,000. We have not experienced any losses in such accounts and believe we are not exposed to any significant risk on cash and cash equivalents.

F-7

Accounts Receivable

The Company grants credit to its customers generally in the form of short-term trade accounts receivable. Accounts receivable are stated at the amount that management expects to collect from outstanding balances. When appropriate, management provides for probable uncollectible amounts through an allowance for doubtful accounts. Management primarily determines the allowance based on the aging of accounts receivable balances, historical write-off experience, customer concentrations, customer creditworthiness and current industry and economic trends. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. As further described in Note 3, due to continuing lower than projected sales, we are holding inventories in excess of what we expect to sell in the next fiscal year. As of February 28, 2010 and February 28, 2009, $2,140,194, and $2,545,978, respectively, of inventories have been classified as long-term assets.

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:

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

Patents and Trademarks

We capitalize the cost of obtaining or acquiring patents and trademarks. Amortization of patent and trademark costs is provided for by the straight-line method over the estimated useful lives of the assets.

Valuation of Long-Lived Assets

The Company accounts for the impairment of long-lived assets, such as fixed assets, patents and trademarks, under the provisions of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 360, “Property, Plant, and Equipment”, which establishes the accounting for impairment of long-lived tangible and intangible assets other than goodwill and for the disposal of a business. Pursuant to FASB ASC 360, we review for impairment when facts or circumstances indicate that the carrying value of long-lived assets to be held and used may not be recoverable. If such facts or circumstances are determined to exist, an estimate of the undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on various valuation techniques, including a discounted value of estimated future cash flows. We report impairment costs as a charge to operations at the time it is recognized. During the years ended February 28, 2010 and 2009, we determined that there was no impairment of long-lived assets.

F-8

Stock-Based Compensation

Fair Value of Financial Instruments

We measure our financial assets and liabilities in accordance with the requirements of FASB ASC 825 “Financial Instruments”. The carrying values of accounts receivable, accounts payable, current notes payable, accrued expenses, and other liabilities approximate fair value due to the short-term maturities of these instruments. The carrying amounts of long-term convertible notes payable approximate their respective fair values because of their current interest rates payable and other features of such debt in relation to current market conditions.

Shipping and handling expenses

We record all shipping and handling billings to a customer as revenue earned for the goods provided in accordance with FASB ASC 605-45-45-19, “Shipping and Handling Fees and Costs”. We include shipping and handling expenses in selling, general and administrative expense. Shipping and handling expenses amounted to $139,170 and $121,718 for the years ended February 28, 2010 and 2009, respectively.

Advertising Expense

Advertising costs are charged to expense as incurred and were immaterial for the years ended February 28, 2010 and 2009.

Research and Development

Research and development costs are expensed as incurred. These costs include the expenses incurred in the development of the 200amp ECU, the Tamgen (dual generator), and the eight inch generator.

Income Taxes

We account for income taxes in accordance with FASB ASC 740, "Income Taxes". Under FASB ASC 740, 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 statement 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. The provision for income taxes represents the tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities.

F-9

We have significant income tax net operating losses; however, due to the uncertainty of the realize-ability of the related deferred tax asset and other deferred tax assets, a valuation allowance equal to the amount of deferred tax assets has been established at February 28, 2010 and 2009.

FASB ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merit.

Earnings (Loss) per Share

We utilize FASB ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common shares available upon exercise of stock options and warrants using the treasury stock method, except for periods of operating loss for which no common share equivalents are included because their effect would be anti-dilutive.

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.

Major Customers

Recently Issued Accounting Pronouncements

In March 2010, the Financial Accounting Standards Board (“FASB”) issued guidance related to revenue recognition for multiple element deliverables which eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the consideration that is attributable to items that already have been delivered. Under the new guidance, the relative selling price method is required to be used in allocating consideration between deliverables and the residual value method will no longer be permitted. This guidance is effective prospectively for revenue arrangements entered into or materially modified in 2011 although early adoption is permitted. A company may elect, but will not be required, to adopt the amendments retrospectively for all prior periods. The Company is currently evaluating this guidance and has not yet determined the impact, if any, that it will have on the consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures Topic 820 “Improving Disclosures about Fair Value Measurements”. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. This pronouncement is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

F-10

In June 2009, the FASB issued new guidance which is now part of ASC 105-10, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. ASC 105-10 (formerly Statement of Financial Accounting Standards No. 168), establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. ASC 105-10 is effective for interim and annual periods ending after September 15, 2009. The adoption of ASC 105-10 did not have a material impact on the Company’s consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this ASU did not have a material impact on its consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of dis-aggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The amendment is effective for interim and annual reporting periods in fiscal year ending after June 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

F-11

In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, “Subsequent Events”), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, “Accounting for Transfers of Financial Assets”) , which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for de-recognizing financial assets, and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe this pronouncement will impact its financial statements.

In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards are effective for us beginning in the first quarter of fiscal year 2010 and we are currently evaluating the impact that adoption will have on our consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards became effective for us beginning in the fourth quarter of fiscal year 2009 and have not had a significant impact on our consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the 2009 financial statements to conform to the 2010 presentation.

NOTE 3 – INVENTORIES

Inventories at February 28, 2010 and 2009 consisted of the following:

	2010			2009

Raw materials	$	2,626,206		$	2,642,833
Finished goods		3,226,614			3,829,139

		5,852,820			6,471,972
Reserve for potential product obsolescence		(2,076,018	)		(2,271,535	)

		3,776,802			4,200,437
Non-current portion		(2,140,194	)		(2,545,978	)
Discount on long term inventory		(136,608	)		(154,459	)

Current portion	$	1,500,000		$	1,500,000

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

F-12

Early in its AuraGen® program, we determined it was most cost-effective to outsource production of components and subassemblies to volume-oriented manufacturers, rather than produce these parts in house. As a result of this decision, and based on then anticipated sales, we purchased, prior to fiscal 2001, a substantial inventory of components at volume prices, most of which was then assembled into finished AuraGen® units. Since sales did not meet such expectations, we have been selling product from this inventory for several years. Management has analyzed its inventories based on its current business plan, current orders for future delivery, and pending proposals with prospective customers and has determined we do not expect to realize all of its inventories within the next year. The net inventories as of February 28, 2010 and 2009, which are not expected to be realized within a 12-month period have been reclassified as long term.

We assessed the net realize-ability of these assets, and the potential obsolescence of inventory. In accordance with this assessment, management has recorded a reserve of $2,076,018 and $2,271,535 at February 28, 2010 and 2009, respectively. Management has recorded a discount on long term inventory of $136,608 and $154,459 at February 28, 2010 and 2009, respectively.

NOTE 4 – PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at February 28, 2010 and February 28, 2009 consists of the following:

	2010		2009

Machinery and equipment	$	1,060,519	$	1,054,423
Furniture and fixtures		1,493,293		1,438,312
Leasehold improvements		481,887		200,124
		3,035,699		2,692,859
Less accumulated depreciation and amortization		2,477,861		2,339,415
Property, plant and equipment, net	$	557,838	$	353,444

Depreciation and amortization expense was $138,448 and $78,980 for the years ended February 28, 2010 and February 28, 2009, respectively.

NOTE 5 – NOTES PAYABLE

Notes payable at February 28, 2010 and February 28, 2009 consisted of the following:

	February 28, 2010		February 28, 2009

Demand notes payable (a)	$	90,000	$	225,000
Convertible notes payable (b)		957,500		500,000
		1,047,500		725,000

Less: Current portion		547,500		225,000

Long-term portion	$	500,000	$	500,000

(a)

Consists of one unsecured demand note payable of $50,000, with interest at an annual rate of 10%, on which $5,229 in interest was accrued during the year ended February 28, 2010, and one unsecured demand note with an original balance of $140,000, an additional $50,000 loaned during July 2009, and a remaining balance of $40,000. During the year ended February 28, 2010, the Company settled $85,000 of the notes plus $15,000 in penalties and interest in 158,333 shares of the common stock of the Company. The Company recorded a loss on settlement of debt of $22,750 on the partial settlement. The Company also converted a note payable of $100,000 and accrued interest of $10,009 into 146,680 shares and recorded a loss on settlement of debt of $5,869 on the settlement.

F-13

(b)

Consists of an unsecured convertible note payable totaling $500,000, bearing interest at a rate of 7%, due in 2013. The note is convertible into our common stock at a price of $3 per share. The Company incurred and paid interest of $34,849 on the note during the year ended February 28, 2010. In April 2009, the Company arranged a debt financing aggregating $192,500 from unrelated parties in exchange for the issuance of 120 day 10% secured convertible promissory notes and 30,800 warrants at an exercise price of $1.25 for the first year. The performance of these notes is secured by inventory of the Company specifically pertaining to the WePower purchase order including all proceeds arising from the sale or lease of all or any part thereof. As of February 28, 2010, there was no inventory pertaining to WePower. The notes are convertible into our common stock at a price of $0.75 per share. The Company accrued interest of $14,369 on these notes during the year ended February 28, 2010. Also consists of six unsecured convertible notes entered into during the second quarter of fiscal 2010 totaling $565,000. The notes carry an interest rate of 10%, are for a term of 180 days, and are convertible into common stock of the company at $0.75 per share. The company accrued interest of $36,996 on the notes during the year ended February 28, 2010. In the year ended February 28, 2010, $300,000 of the notes payable and $16,950 of accrued and unpaid interest was converted into 539,553 shares of common stock of the Company. Except for the $500,000 note due in 2013, these notes are past due and therefore due on demand.

The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants using the Black Scholes method assuming a volatility of the stock of 107%, term of five years and a discount of 2.625% was determined to be $18,661 which was recorded as debt discount, a reduction of the carrying amount of the debt. The beneficial conversion feature on the notes was $57,161 which was also recorded as debt discount. The debt discount was amortized over the term of the note and charged to interest expense. During the year ended February 28, 2010, $75,822 was expensed.

Future maturities of notes payable at February 28, 2010 are as follows:

Year Ending February 28,
2011			$ 547,500
2012			-
2013			500,000
Total			$ 1,047,500

NOTE 6 – NOTES PAYABLE – RELATED PARTY

Notes payable – related party consist of unsecured notes payable to a member of our Board of Directors, payable on demand, bearing interest at a rate of 10% per annum. During the years ended February 28, 2010 and 2009, interest amounting to $339,833 and $103,503, respectively, was incurred on these notes. As of February 28, 2010 and 2009, accrued interest on these notes amounted to $453,199 and $113,366 , respectively.

NOTE 7 - ACCRUED EXPENSES

Accrued expenses at February 28, 2010 and 2009 consisted of the following:

	2010		2009

Accrued payroll and related expenses	$	1,716,279	$	904,849
Accrued interest		494,830		128,366
Other		10,650		4,702
Total	$	2,221,759	$	1,037,917

F-14

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Leases

On May 1, 2008, we entered into a lease for a new facility of approximately 25,500 square feet, near our current facility. The lease is for a term of five years, has an option to extend for five years, and carries a base rent of $28,019 per month until November 1, 2010 when the monthly rent increases to $30,120. We have not yet fully moved into this facility and are continuing manufacturing operations at our old facility. We are currently on a month to month lease in that facility. In December 2009, we entered into a lease for a facility in Georgia of approximately 8,000 square feet. The lease is for a term of three years, has an option to extend for three years, and carries an initial base rent of $3,000 per month increasing to $3,090 in December 2010 and $3,183 in December 2011. In accordance with the terms of certain of the leases, the Company is responsible for common area charges. Rent expense charged to operations amounted to $820,634 and $687,768 for the years ended February 28, 2010 and 2009, respectively.

Rent commitments for the next four years ending on February 28:

2011	$	380,904
2012	$	398,803
2013	$	390,089
2014	$	60,241
Total	$	1,230,037

NOTE 9 - STOCKHOLDERS' EQUITY

Common Stock

At February 28, 2010 and 2009, we had 75,000,000 and 50,000,000 shares of $0.0001 par value common stock authorized for issuance, respectively. During the years ended February 28, 2010 and 2009, we issued 6,344,291 and 8,561,231 shares of common stock, respectively.

In the year ended February 28, 2009, we issued 2,915,000 shares of common stock for cash proceeds of $2,437,057 and collected subscription receivables of $677,255; 2,397,717 shares were issued upon the exercise of warrants for total consideration of $2,282,405; 400,000 shares of common stock were issued for the acquisition of $400,000 worth of inventory and supplies in connection with the acquisition of the refrigeration assets of Emerald Commercial Leasing; 430,329 shares of common stock were issued for the exercise of warrants - the consideration received by the Company was the relief of the note payable the Company owed to the note holder; 100,000 shares of common stock were issued pursuant to an employment agreement we entered into with our Vice President; 2,069,742 shares of common stock were issued upon the conversion of $2,069,742 of secured notes payable and associated accrued interest. In conjunction with this transaction, the Company recorded an induced conversion charge in accordance with SFAS 84, in the amount of $368,900, this is included in the interest expense. 98,442 shares of common stock were issued in settlement of $98,442 of accounts payable; and 150,000 shares of common stock were issued as fees to members of our Board of Directors for a loan and associated loan guarantees by the Board members. Shares issued for non cash consideration were valued pursuant to EITF 96-18. The Company recorded a gain on settlement of debt of $32,820 and $6,742, respectively for the stock issued for settlement of accounts payable of $98,442 and for stock issued for interest settlement of notes.

F-15

Employee Stock Options

In September, 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan, subject to shareholder approval, which was obtained at a special shareholders meeting. Under the Plan, the Company may grant options for up to the greater of Three Million (3,000,000) or 10% of the number of shares of the Common Stock of Aura from time to time outstanding. The exercise price of each option shall be at least equal to the fair market value of such shares on the date of grant. The term of the options may not be greater than ten years, and they typically vest over a three year period.

During fiscal 2010, the Board of Directors determined that, in order to provide incentives to its employees, it was in the best interest of the Company to cancel and replace the outstanding employee options that had been granted. With the employees consent, the Company cancelled all 1,941,500 outstanding employee options that previously had exercise prices ranging from $2.00 to $3.00, and issued 6,515,500 new five year options with a 3 year vesting period, and an exercise price of $1.50. Employees were given credit towards the three year vesting period extending from the date of their original hire. In accordance with FASB ASC 718, the Company accounted for this transaction as a modification. Accordingly, the incremental compensation cost resulting from this modification was determined to be $4,487,725 calculated as the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The fair values were calculated using the Black-Scholes option pricing. Assumptions used for the modified award were a risk free rate of return of 3.23%, volatility of 141.61%, a dividend yield of 0%, and an expected life of 5 years. Assumptions used for the original awards immediately before they were modified were risk free rates of return of ranging from 1.75% to 2.5%, volatility of 141.61%, a dividend yield of 0%, and expected lives ranging from 2.75 to 4 years.

Also during the year ended February 28, 2010, the Company granted 400,000 options to the President. These options vest over three years, have an exercise price of $1.50, and have a five year life. The grant date fair value of these options amounted to $ 330,187 which was calculated using the Black-Scholes option pricing model with the following assumptions: risk free rate of return of 3.23%, volatility of 141.61%, a dividend yield of 0%, and an expected life of 5 years.

During the year ended February 28, 2009, the Company granted 450,000 options to an employee to purchase our stock at a price of $3.00. These options were modified during the year ended February 28, 2010 as described above.

The Company incurred stock options related expenses of $4,308,448 and $378,184, during the years ended February 28, 2010 and 2009, respectively.

Activity in this plan is as follows:

	2006 Plan

		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Number of Options

Outstanding, February 28, 2008		$	2.00-3.00	$	0.00		1,491,500
Granted		$	3.00				450,000
Cancelled		$	3.00				(28,500	)
Outstanding, February 28, 2009		$	2.00-3.00				1,913,000
Granted		$	1.50				6,915,500
Cancelled		$	1.50-3.00				(2,545,000	)
Outstanding, February 28, 2010		$	1.50	$	0.00		6,283,500

F-16

The exercise prices for the options outstanding at February 28, 2010, and information relating to these options is as follows:

Options Outstanding

Exercisable Options

Range of Exercise

Price

Number

Weighted Average Remaining Life

Weighted Average Exercise Price

Weighted Average Remaining Life

Number

Weighted Average Exercise Price

$1.50

6,283,500

4.3 years

1.50

4.3 years

5,917,583

1.50

The weighted average fair values of the options on the date of grant for the year ended February 28, 2010 and 2009 were $0.83 per share and $1.24 per share, respectively.

A summary of the status of the Company’s non-vested shares as of February 28, 2010, and changes during the year ended February 28, 2010, is presented below:

Non-vested Shares	Shares		Weighted-Average Grant-Date Fair Value
Non-vested at February 28, 2009	514,500		$	1.24
Granted	6,915,500		$	0.83
Vested	(6,233,881	)	$	0.83
Canceled	(830,202	)	$	1.08

Non-vested at February 28, 2010	365,917		$	0.83

As of February 28, 2010, there was $528,834 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.25 years.

Warrants

Activity in issued and outstanding warrants is as follows:

	Number of Shares	Exercise Prices
Outstanding, February 28, 2008	6,980,179	$2.00-4.00
Granted	2,785,606	$1.00-$3.00
Exercised	(2,828,046)	$1.00
Cancelled	(3,332,451)	$3.00
Expired	(152,777)	$2.00-2.50
Outstanding, February 28, 2009	3,452,511	$2.00-3.00
Granted	3,254,710	$0.75-1.25
Exercised	(94,428)	$1.00
Outstanding, February 28, 2010	6,612,793	$0.75-4.00

During the year ended February 28, 2010, 1,900,000 warrants were granted to Board members and 300,000 were granted to an advisor to the Board. The warrants have an exercise price of $1.50. The grant date fair value of the warrants amounted to $1,836,531 which was calculated using the Black-Scholes option pricing model with the following assumptions: risk free rate of return of 3.23%, volatility of 141.61%, a dividend yield of 0%, and an expected life of five years. During the year ended February 28, 2010, the Company also granted 1,054,710 five year warrants attached to private placement of stock, with exercise prices ranging from $0.75-$1.25.

F-17

During the year ended February 28, 2009, 100,000 warrants were granted to a Board member as a fee for entering into a loan agreement with the Company, and 50,000 warrants, 12,500 each, were issued to the other four Board members as a fee for guaranteeing the note. The warrants have an exercise price of $3. The grant date fair value of the warrants amounted to $17,338 which was calculated using the Black-Scholes option pricing model with the following assumptions: risk-free rate of return of 2.25%, volatility of 80.28%, and dividend yield of 0% and expected life of five years. During the year ended February 28, 2009, the Company also re-priced 2,635,606 warrants granted originally with equity issuance in February 2006. The new exercise price was $1 per share.

The exercise prices for the warrants outstanding at February 28, 2010, and information relating to these warrants is as follows:

Range of Exercise Prices	Stock Warrants Outstanding	Stock Warrants Exercisable	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price of Warrants Outstanding	Weighted-Average Exercise Price of Warrants Exercisable	Intrinsic Value
$0.75-1.25	1,354,710	1,354,710	53 months	$1.25	$1.25	$0.00
$1.50	1,900,000	1,900,000	52 months	$1.50	$1.50	$0.00
$2.00-$3.00	1,934,991	1,934,991	12 months	$2.44	$2.49	$0.00
$3.50	805,589	805,589	22months	$3.50	$3.50	$0.00
$4.00	617,503	617,503	11 months	$4.00	$4.00	$0.00
	6,612,793	6,612,793

NOTE 10 – GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the years ended February 28, 2010 and 2009, the Company incurred losses of $16,092,777 and $9,843,962, respectively and had negative cash flows from operating activities of $6,285,449 and $6,311,970, respectively.

We plan to add senior quality assurance and quality control staff as well as a number of mechanical and electrical engineers, a number of technicians, and a number of test engineers.

While no assurances can be given, we developed a business model for fiscal 2011 that projects over $30 million of business. The projections are based on approximately $10 million for wind energy applications under the WePower agreement that was signed in February 2009, approximately $5.0 million for military applications, and estimates of approximately $10.0 million for transport refrigeration application. Additionally, $5.0 million is projected for numerous industrial and OEM applications. The total number of systems corresponding to the above projections is approximately 5,000.

We are selling systems for all of the applications currently identified in our business model for fiscal 2010. In addition, we are also in the process of enhancing our product line to address an even larger market segment. We currently provide 5 kW, 8.5 kW and 16 kW solutions and we plan to introduce during the next twelve months 4kW, 12 kW, 25 kW and 50 kW solutions. While there can be no assurances given that we will complete all the developments described above and be able to commercialize them in the planned time, our business model for fiscal 2010 does not contemplate sales for any product currently available.

F-18

If the Company is unable to generate profits and is unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether.

Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability.

Because of our historic net losses and negative working capital position, our independent auditors, in their report on our consolidated financial statements for the year ended February 28, 2010 expressed substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.

NOTE 11- INCOME TAXES

The Company did not record any income tax expense due to the net loss during the years ended February 28, 2010 and 2009. The actual tax benefit differs from the expected tax benefit computed by applying the combined United States corporate tax rate and the State of California tax rate of 40% to loss before income taxes as follows for the years ended February 28, 2010 and 2009:

		2010	2009
Current:	$		$
Federal		-		-
State		800		800

Total		800		800

Deferred
Federal		-		-
State		-		-

Total		-		-
Total Income Tax Provision
	$	800	$	800

The provision for income tax is included with other expense in the accompanying consolidated financial statements.

	2010	2009

Expected tax benefit	34.0%	34.0%
State income taxes, net of federal benefit	6.0	6.0
Changes in valuation allowance	(40.0)	(40.0)
Total	-%	- %

The following table summarizes the significant components of our deferred tax asset at February 28, 2010 and 2009:

	2010	2009
Deferred tax asset
Primarily relating to net operating loss carry-forwards, but also reserves for inventory and accounts receivable, stock-based compensation and other	$124,000,000	$119,000,000
Valuation allowance	(124,000,000 )	(119,000,000)
Net deferred tax asset	$ -	$ -

F-19

We recorded an allowance of 100% for deferred tax assets due to the uncertainty of its realization.

At February 28, 2010, we had operating loss carry-forwards of approximately $310,000,000 for federal purposes, which expire through 2024, and $56,000,000 for state purposes, which expire through 2016.

We follow FASB ASC 740 related to uncertain tax positions. Under FASB ASC 740, the impact of an uncertain tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. At February 28, 2010 and 2009, we have no unrecognized tax benefits.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of February 28, 2010 and 2009, we have no accrued interest and penalties related to uncertain tax positions.

We are subject to taxation in the U.S. and California. Our tax years for 2008 and forward are subject to examination by our tax authorities. We are not currently under examination by any tax authority.

NOTE 12 - EMPLOYEE BENEFIT PLANS

We sponsor two employee benefit plans: The Employee Stock Ownership Plan (the "ESOP") and a 401(k) plan.

The ESOP is a qualified discretionary employee stock ownership plan that covers substantially all employees. We did not make any contributions to the ESOP during the years ended February 28, 2010 and February 28, 2009.

We sponsor a voluntary, defined contribution 401(k) plan. The plan provides for salary reduction contributions by employees and matching contributions by us of 100% of the first 4% of the employees' pre-tax contributions. The matching contributions included in expense were $73,193 and $30,821 for the years ended February 28, 2010 and 2009, respectively.

NOTE 13 - SEGMENT INFORMATION

We are a United States based company providing advanced technology products to various industries. The principal markets for our products are North America, Europe, and Asia. All of our operating long-lived assets are located in the United States. We operate in one segment.

Total net revenues from customer geographical segments are as follows for the years ended February 28, 2010 and February 28, 2009:

	2010		2009

United States	$	2,405,709	$	1,697,089
Canada		280,501		282,736
Europe		51,117		6,139
Asia		477,465		429,565
Total	$	3,214,792	$	2,415,529

NOTE 14 – SUBSEQUENT EVENTS

Subsequent to the end of the year, we have received $1,050,000 from a member of our Board for a 10% demand note payable, and $360,000 from our CEO for a convertible note bearing interest at a rate of 10%. The note is for 120 days and is convertible into shares of our common stock at a price of $0.75 per share. We also issued 757,130 shares of common stock, with 350,642 warrants attached at an exercise price of $1.50, for net proceeds of $471,000.

F-20