<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                                  Act of 1934.


                  FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1997

                         Commission File Number 0-20684



                            AUREAL SEMICONDUCTOR INC.
             (Exact name of registrant as specified in its charter)

             DELAWARE                                         94-3117385
    (State or other jurisdiction of                        (I.R.S. Employer
     incorporation or organization)                      Identification Number)

                              4245 TECHNOLOGY DRIVE
                                FREMONT, CA 94538
                    (Address of principal executive offices)
                            Telephone: (510) 252-4245

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 filed all documents required
to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.

                                                Yes    X     No
                                                   ---------    ---------

At August 6, 1997, 41,724,133 shares of common stock, $0.001 par value, of the
registrant were outstanding.

This report on Form 10-Q contains 18 pages. The exhibit index is on page 17.





<PAGE>   2

                            AUREAL SEMICONDUCTOR INC.


                                    FORM 10-Q

                                Table of Contents

<TABLE>
<CAPTION>
                                                                                                                Page
<S>      <C>                                                                                                     <C>
PART I.  FINANCIAL INFORMATION
         Item 1.  Financial Statements..........................................................................  3
         Item 2.  Management's Discussion and Analysis of Financial Condition and Results of
                   Operations..................................................................................  11

PART II.  OTHER INFORMATION
         Item 4.  Submission of Matters to a Vote of Security Holders........................................... 16
         Item 6.  Exhibits and Reports on Form 8-K.............................................................. 16
</TABLE>















                                       2


<PAGE>   3

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS




                            AUREAL SEMICONDUCTOR INC.

               INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

      The Interim Condensed Consolidated Financial Statements of Aureal
Semiconductor Inc. (the "Company") have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been omitted pursuant to such rules and regulations. The
disclosures included in the Interim Condensed Consolidated Financial Statements
should be read in conjunction with the Company's audited financial statements at
December 29, 1996 and the notes thereto included in the Company's 1996 Annual
Report on Form 10-K.

     The preparation of financial statements in conformity with generally
accepted accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

     The Interim Condensed Consolidated Financial Statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of financial position, results of
operations and cash flows for such periods. The results of operations for the
fiscal quarter ended June 29, 1997 are not necessarily indicative of the results
that may be expected for any subsequent quarter or the entire fiscal year ending
December 28, 1997.










                                       3

<PAGE>   4

AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                              June 29,          December 29,
                                                                                 1997               1996
                                                                              ---------           ---------
                                                                             (Unaudited)
<S>                                                                           <C>                 <C>      
ASSETS:

   Current assets:
       Cash and cash equivalents                                              $      16           $      18
       Restricted cash                                                              103                  --
       Accounts receivable                                                          177                  63
       Inventories                                                                  319                  74
       Prepaid expenses and other current assets                                    287                 403
                                                                              ---------           ---------
           Total current assets                                                     902                 558
   Property and equipment:
       Machinery and equipment                                                    2,775               2,596
       Furniture, fixtures and improvements                                         915                 914
                                                                              ---------           ---------
                                                                                  3,690               3,510
       Accumulated depreciation and amortization                                 (2,848)             (2,518)
                                                                              ---------           ---------
           Net property and equipment                                               842                 992

   Reorganization Asset, less accumulated amortization
       of $12,346 in 1997 and $11,096 in 1996                                     1,250               2,500
   Other assets                                                                      73                  95
                                                                              ---------           ---------
           Total assets                                                       $   3,067           $   4,145
                                                                              =========           =========


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):

   Current liabilities:
       Accounts payable                                                       $     483           $     670
       Accrued compensation and benefits                                          1,041               1,278
       Other accrued liabilities                                                  1,398               1,229
       Current portion of pre-petition claims                                       915                 881
                                                                              ---------           ---------
           Total current liabilities                                              3,837               4,058

   Line of Credit                                                                16,595              10,325
   Long-term portion of pre-petition claims and deferred obligations              5,031               5,523
                                                                              ---------           ---------
           Total liabilities                                                     25,463              19,906
                                                                              ---------           ---------

   Stockholders' equity (deficit):
       Common stock, $0.001 par value:
           Authorized shares - 100,000,000; Issued and outstanding
           shares - 39,734,326 in 1997 and 39,190,795 in 1996                        40                  39
       Additional paid-in capital                                               105,403             105,053
       Accumulated deficit                                                     (127,839)           (120,853)
                                                                              ---------           ---------
           Total stockholders' equity (deficit)                                 (22,396)            (15,761)
                                                                              ---------           ---------

           Total liabilities and stockholders' (deficit)                      $   3,067           $   4,145
                                                                              =========           =========
</TABLE>







                             See accompanying notes.


                                       4


<PAGE>   5

AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)




<TABLE>
<CAPTION>
                                                             Quarter Ended                      Two Quarters Ended
                                                             -------------                      ------------------
                                                    June 29, 1997      June 30, 1996      June 29, 1997     June 30, 1996
                                                    -------------      -------------      -------------     -------------
                                                               (Unaudited)                          (Unaudited)
<S>                                                   <C>                <C>                <C>                <C>
Net sales                                             $    695           $    511           $  1,122           $  3,043
Cost of sales                                               23                123                 43                242
                                                      --------           --------           --------           --------
Gross Margin                                               672                388              1,079              2,801

Operating expenses:
     Research and Development                            1,561              1,705              2,999              3,322
     Sales and Marketing                                   896                255              1,674                405
     General and Administrative                            597                738              1,181              1,292
     Amortization of Reorganization Asset                  625                625              1,250              1,250
     Write-off of acquired research and
          development in progress                         --                6,013               --                6,013
                                                      --------           --------           --------           --------
Total operating expenses                                 3,679              9,336              7,104             12,282
                                                      --------           --------           --------           --------


Operating loss                                          (3,007)            (8,948)            (6,025)            (9,481)

     Interest income                                         3                 72                  6                137
     Interest expense                                     (643)              (718)            (1,165)            (1,503)
     Other income (expense)                                145                 16                198                197
                                                      --------           --------           --------           --------
Loss from operations before income taxes                (3,502)            (9,578)            (6,986)           (10,650)

Provision for income taxes                                --                 --                 --                 --
                                                      --------           --------           --------           --------

Net loss                                              $ (3,502)          $ (9,578)          $ (6,986)          $(10,650)
                                                      ========           ========           ========           ========

Net loss per share                                    $   (.09)          $  (0.30)          $   (.18)          $  (0.39)
                                                      --------           --------           --------           --------

Shares used in calculating per share amounts            39,501             31,954             39,403             27,653
                                                      ========           ========           ========           ========
</TABLE>





                                        
                            See accompanying notes.











                                       5

<PAGE>   6



AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                    Two Quarters Ended
                                                                                    ------------------
                                                                                  June 29        June 30,
                                                                                    1997          1996
                                                                                  --------      -------- 
<S>                                                                               <C>           <C>      
(Unaudited)
OPERATING ACTIVITIES
Net loss from operations                                                          $ (6,986)     $(10,650)
Adjustments to reconcile net loss from operations
  to net cash used in operating activities:
     Depreciation and amortization                                                   1,601         1,573
     Write-off of acquired research and development in process                        --           6,013
     Changes in operating assets and liabilities - net of assets
       acquired and liabilities assumed in 1996:
         Restricted cash                                                              (103)         --
         Accounts receivable                                                          (114)           29
         Inventories                                                                  (245)          214
         Prepaid expenses and other current assets                                     116           238
         Other assets                                                                 --              64
         Accounts payable                                                             (187)         (360)
         Accrued compensation and benefits, and
           other accrued liabilities                                                   (48)       (1,566)
                                                                                  --------      --------
Net cash used in operating activities                                               (5,966)       (4,445)
                                                                                  --------      --------

INVESTING ACTIVITIES
Payment for acquisition of business, net of cash acquired                             --          (2,970)
Acquisition of property and equipment                                                 (179)         (213)
                                                                                  --------      --------
Net cash used in investing activities                                                 (179)       (3,183)
                                                                                  --------      --------

FINANCING ACTIVITIES
Proceeds from Line of Credit                                                         6,770         1,883
Repayment on Line of Credit                                                           (500)      (14,403)
Principal payments on pre-petition claims                                             (458)         (367)
Proceeds from issuance of common stock, net of
  issuance costs                                                                       331        21,968
                                                                                  --------      --------
Net cash provided by financing activities                                            6,143         9,081
                                                                                  --------      --------

Net increase (decrease) in cash and cash equivalents                                    (2)        1,453
Cash and cash equivalents at beginning of period                                        18            22
                                                                                  --------      --------
Cash and cash equivalents at end of period                                        $     16      $  1,475
                                                                                  ========      ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                                     $    877      $  2,144
</TABLE>



                             See accompanying notes.





                                       6


<PAGE>   7

AUREAL SEMICONDUCTOR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.   THE COMPANY AND RECENT EVENTS

     Aureal Semiconductor Inc., together with its subsidiary Crystal River
Engineering, Inc. (combined, the "Company") specialize in the design and
marketing of audio semiconductor technologies for use in both the PC and home
electronics markets. Crystal River Engineering, Inc. ("CRE"), founded in 1987
and acquired by Aureal in the second quarter of 1996, has been a pioneer in the
development of 3D audio technologies. The Company's business involves not only
the development and sale of audio processing semiconductor chips, but the 
licensing of technology which is designed to define and develop advanced audio
standards in the marketplace.

     In August 1997, the Company completed a private placement of equity 
capital. The transaction provided proceeds of $3.8 million from the sale of 
1.9 million common stock units. Each unit consisted of one share of common stock
and one-half of one warrant to purchase one share of common stock at a price of
$2.00 per unit. In conjunction with the equity transaction, the total 
availability under the Company's line of credit was increased from $20.0 
million to $31.5 million. The maturity date on this line of credit was extended
to March 31, 1999, with an additional year extension available at the Company's
option. In addition, a total of 3,150,000 warrants for the purchase of common 
stock were issued to the debt holders of the $31.5 million line of credit 
(See Note 5).

     On July 14, 1997, the Company announced the availability of pre-production
samples of the Vortex AU8820, a PCI-based AC '97 Digital Audio Processor. It is
expected to be the first in a series of single-chip devices based on the Vortex
audio chip architecture. Under development at Aureal since 1995, the Vortex
architecture enables advanced audio quality and features while maintaining 
support of existing legacy audio functions. Production quantities are expected 
to be available in the fourth quarter of this year.

     In June 1997, Aureal announced three significant licensing agreements. ATI
Technologies Inc., Cirrus Logic, Inc., and S3 Incorporated agreed to license
both A3D Interactive and A3D Surround three-dimensional audio technologies from
Aureal. ATI designs and manufactures multimedia solutions for PCs and is one of
the world's leading suppliers of video and 2D/3D graphics accelerators to OEM
and retail customers. Cirrus Logic, is a leading manufacturer of advanced
integrated circuits. S3 Incorporated is the world's largest supplier of
multimedia acceleration hardware and its associated software.

     In March 1997, both Diamond Multimedia Systems Inc. and Oak Technology,
Inc. announced products which include the licensed "A3D Interactive" technology
from Aureal. In addition, that same technology has been supported by over 50
leading game developers and Microsoft's new DirectSound 5.0 standard.

     In early September 1996, the Company introduced Aureal 3D ("A3D"), the
first interactive 3D audio solution for implementation in both the PC and
consumer electronics applications. The introduction included the announcement of
3D technology licensing agreements with Diamond Multimedia Systems Inc. and Oak
Technology, Inc. Also in September, the Company announced the VSP901 Dolby Pro
Logic Surround Processor, an Aureal proprietary semiconductor designed to
produce a complete Dolby surround sound solution utilizing only two speakers.

     The Company, in May 1996, acquired 100% ownership of CRE, a privately held
firm specializing in 3D audio technology development. The total recorded cost of
the acquisition was $6.4 million. Aureal recorded, in the second quarter of
1996, a write-off of $6.0 million due to the recognition that in-process
research and development efforts associated with CRE's 3D audio technologies had
not reached technological feasibility with respect to the Company's product line
at the date of acquisition.

     In three transactions from February through June 1996, the Company
completed the private sale of 18.9 million shares of common stock for $22
million. The proceeds from the sale of this common stock have been used for
working capital, to pay down the existing working capital line of credit and to
partially fund the acquisition of CRE (see above).








                                       7

<PAGE>   8

     In August 1995, the Company announced that it was divesting its multimedia
components business to implement a business plan based on development and sale
of software and semiconductor solutions providing advanced audio for the PC and
consumer electronics markets. As part of this change in business, in the first
quarter of 1996, the Company licensed the Media Vision brand name, related trade
names, other assets and liabilities of its previous retail products business to
a third party. In conjunction with the Company's change in business, it formally
changed its name to Aureal Semiconductor Inc. at its Annual Stockholders'
Meeting in May 1996. The Company's stock symbol on the OTC Bulletin Board is
AURL.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation

     The Interim Condensed Consolidated Financial Statements of Aureal
Semiconductor Inc. have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The disclosures
included in the Interim Condensed Consolidated Financial Statements should be
read in conjunction with the Company's audited financial statements at December
29, 1996 and the notes thereto included in the Company's 1996 Annual Report on
Form 10-K.

     The Interim Condensed Consolidated Financial Statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of financial position, results of
operations and cash flows for such periods. The results of operations for the
fiscal quarter and two quarters ended June 29, 1997 are not necessarily
indicative of the results that may be expected for any subsequent quarter or the
entire fiscal year ending December 28, 1997.

     Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

     Cash Equivalents and Restricted Cash

     The Company considers all investments purchased with an original maturity
of three months or less to be cash equivalents. As of June 29, 1997, $103,000 in
restricted cash deposits primarily represented collateral for an outstanding
Stand-by Letter of Credit, supporting product purchase orders.

     Inventories

     Inventories, which consist predominantly of finished goods at both balance
sheet dates presented, are stated at the lower of cost or market value.

     Property and Equipment

Property and equipment are stated at cost and depreciated utilizing the
straight-line method over their estimated useful lives (one and one-half to
seven years).

     Revenue Recognition

The Company's major sources of revenue consist of sales of proprietary design,
advanced audio semiconductor chips, licensing of related audio technologies and
sales of PC hardware and software for utilization of the audio technologies.
Revenue is recognized upon shipment for product sales. With respect to licensing
transactions, revenue is recognized upon delivery of certain technologies for
development fees, and upon reported sales of licensed units for royalties.






                                        8

<PAGE>   9

     Concentration of Credit Risks

     Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to trade receivables is limited as the
majority of the Company's customers are well-established companies or government
agencies. Additionally, the Company establishes an allowance for doubtful
accounts, if necessary, based upon factors surrounding the credit risk of
specific customers, historical trends and other available information.

     Stock Option Accounting - SFAS No. 123 Adoption

     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" which requires increased disclosure of certain calculated value
information related to stock options granted to employees and new accounting
treatment for stock-based compensation granted to non-employees. The Company
adopted SFAS No. 123 effective for 1996. As a result, a charge of $10,000 was
recognized during each of the two quarters ended June 29, 1997 related to stock
options granted to non-employees.

     Earnings (Loss) Per Share

     Loss per share is based upon the weighted average common shares
outstanding. Primary earnings (loss) per share is based upon the weighted
average common and common equivalent shares outstanding during the period.
Equivalent shares, if any, are calculated using the treasury stock method and
consist of outstanding stock options that have a dilutive effect on earnings per
share (EPS). No stock option information was incorporated into the calculations
for any fiscal period presented as, due to the net loss position, any affect
would be antidilutive.

     The Financial Accounting Standards Board has issued SFAS No. 128 which is
effective for financial statements for periods ending after December 15, 1997.
Earlier application is not permitted. SFAS No. 128 replaces primary EPS with
basic EPS. Fully diluted EPS, called diluted EPS under SFAS No. 128, is still
calculated using the treasury stock method and includes outstanding warrants and
stock options that have a dilutive effect on earnings per share. Pro forma
amounts of earnings (loss) per share for both basic EPS and diluted EPS, for all
quarters shown, would not differ from the amounts stated.

     Amortization of Intangibles

     At December 31, 1994, the reorganization value of the Company in excess of
its net assets generated a $44.1 million intangible value that was classified as
a reorganization asset in the consolidated balance sheet of the Company
("Reorganization Asset"). The value of the Reorganization Asset was reduced in
the second quarter of 1995 as the Company exited the retail products business.
The net remaining Reorganization Asset of $1,250,000 as of June 29, 1997 is
being amortized at a rate of $625,000 per quarter through 1997.

     In conjunction with the acquisition of (CRE) made during the second quarter
of 1996 (See Note 3), the allocation of the purchase price included an
intangible asset of $150,000. Amortization over the estimated useful life of
eighteen months for the intangible asset value commenced in mid-1996. As a
result of further asset value allocations throughout the year, the intangible
asset was reduced by $61,000 during 1996.

3.   ACQUISITION OF CRYSTAL RIVER ENGINEERING, INC. ("CRE")

     During the second quarter of 1996, the Company acquired 100% ownership of
CRE, a privately held firm specializing in the development of 3D audio
technologies. The acquisition consideration included purchase of stock for cash
totaling approximately $2.9 million, the exchange of stock options valued at
$2.8 million and other cash considerations (both current and deferred) totaling
approximately $0.6 million. The acquisition was recorded using the purchase
accounting method. The fair value of CRE assets and liabilities at the date of
acquisition were recorded in the Company's consolidated financial statements. As
part of the allocation of fair values, the Company recorded a non-recurring
write-off of approximately $6.0 million in the second quarter of 1996 due to
recognition that in-process research and development efforts associated with
CRE's 3D audio technology had not reached technological feasibility with respect
to the Company's product line at the date of acquisition.




                                       9

<PAGE>   10

4.   LINE OF CREDIT

     The Company maintains a line of credit managed by TCW Special Credits, an
affiliate of the TCW Group, Inc. ("TCW"), (See Note 5). The maturity date
(originally March 1, 1995) and the total availability under the line (ranging
from $10 million to $31.5 million to date) have been negotiated periodically
with TCW. In conjunction with the private placement of equity, finalized in 
August 1997, the line of credit was increased from $20.0 million to $31.5
million, and the maturity date was extended to March 31, 1999. In addition, the
Company has an option to extend the due date an additional year, to March 31,
2000. Borrowings under the facility are secured by substantially all the assets
of the Company and bear interest at the rate of prime (8.50% at June 29, 1997)
plus five percent. At June 29, 1997, $16.6 million was outstanding under the
line.

     The line of credit lenders include entities affiliated with TCW Special
Credits and DDJ Capital Management LLC. As of August 6, 1997 these entities
controlled approximately 44% and 16% of the Company's outstanding common stock,
respectively.

5.   SUBSEQUENT EVENT - DEBT AND EQUITY FUNDING

     On August 6 1997, the Company completed a private placement of equity
capital, as well as increasing and extending the Company's line of credit. The
equity transaction provided proceeds of $3.8 million from the sale of 1.9
million common stock units at a price of $2.00 per unit. Each unit consists of
one share of common stock and one-half of one warrant to purchase one share of
common stock. In conjunction with the equity transaction, the total availability
under the Company's line of credit was increased from $20.0 million to $31.5
million. The maturity date on this line of credit was extended to March 31,
1999, with an additional year extension available at the Company's option. In
addition, a total of 3,150,000 warrants for the purchase of common stock were
issued to the debt holders of the $31.5 million line of credit. Up to 2,000,000
of the warrants associated with the line of credit can be rescinded by the
Company upon cancellation of up to $20,000,000 of borrowing capacity, at the
rate of one warrant rescission for each $10 of borrowing capacity canceled by
the Company prior to March 31, 1998. The warrants will expire four years after
issuance, unless exercised. Net proceeds from the sale of stock were used to pay
down the line of credit.

6.   INCOME TAXES

     The Company was not required to provide for income taxes in the first two
quarters of 1997 or 1996 due to its net operating losses. No tax benefit has
been recorded for the losses due to the uncertainty as to the realizability.

     At December 29, 1996, the Company had available net operating loss
carryforwards ("NOL's") of approximately $269 million to reduce future taxable
income. The NOL's expire on various dates through 2011. In connection with the
adoption of fresh start accounting, any tax benefit resulting from the use of
the NOL's generated prior to the bankruptcy plan confirmation in 1994 will be
applied to reduce the Reorganization Asset and any further benefit will be
reported as a direct addition to stockholders' equity.
















                                       10

<PAGE>   11

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

     THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN AND THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 29, 1996, CONTAINED IN FORM 10-K FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.

     FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
INVESTORS ARE CAUTIONED THAT SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, DEPENDENCE ON THE PC AND CONSUMER
ELECTRONICS INDUSTRIES AND ON PRODUCT LINES BASED ON NEW TECHNOLOGIES; FOUNDRY
CAPACITY, AVAILABILITY AND RELIABILITY; COMPETITION AND PRICING PRESSURES, AND
OTHER RISKS DETAILED BELOW AND FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION.

OVERVIEW

     The Company's strategy combines the development and sale of audio
processing semiconductor chips, with the licensing of technology to strategic 
partners in order to define and develop advanced audio standards in the 
marketplace. Since early 1996, the Company has focused primarily on the 
creation and development of audio semiconductor products, as well as
establishing Aureal's technology in the market.

     Thus far in 1997, Aureal has concentrated its efforts toward bringing
products to market and establishing both licensing and strategic partners. The
Company has signed licensing agreements with a number of leading companies
providing for the inclusion of Aureal's A3D Interactive technologies in their
products. Product releases and availability dates are dependent upon each
licensee's abilities to develop and release products.

      An important milestone for the Company has been the announcement of the
availability of pre-production samples of the Vortex AU8820, a PCI-based AC '97
Digital Audio Processor. It is expected to be the first in a series of
single-chip devices based on the Vortex audio chip architecture. Production
quantities are expected to be available in the fourth quarter of this year.

     Revenues during the first two quarters of 1997 reflect the start of the
second year in the Company's business plan to design and market advanced audio
semiconductor technologies to both PC and consumer electronics OEMs. This
contrasts with the first two quarters of 1996, when revenues pertained to legacy
audio technologies developed prior to the Company's refocus in early 1996. In
addition, a number of structural changes took place in the Company's business
during 1996 and the first two quarters of 1997. Some of these events are
detailed in Footnote 1 to the Condensed Consolidated Financial Statements in
Item 1 of this report. These changes include:

     -    In the first quarter of 1996, the Company licensed the Media Vision 
          brand name, related trade names and other assets of its previous
          retail products business to a third party. The agreement transferred
          the retail customer service and technical support obligations to the
          buyer.

     -    In three transactions from February through June 1996, the Company
          completed the private sale of 18.9 million shares of common stock for
          $22 million.

     -    The Company, in May 1996, acquired 100% ownership of CRE, a privately
          held firm specializing in 3D audio technology development. The total
          recorded cost of the acquisition was $6.4 million. Aureal recorded, in
          the second quarter of 1996, a write-off of $6.0 million due to the
          recognition that in-process research and development efforts
          associated with CRE's 3D audio technologies had not reached
          technological feasibility with respect to the Company's product line
          at the date of acquisition.

     -    Subsequent to the closing of the second quarter of 1997, the company
          completed a private sale of 1.9 million shares of common stock for 
          $3.8 million. In conjunction with the equity transaction, the total
          availability under the Company's line of credit was increased from
          $20.0 million to $31.5 million. Net proceeds from the sale of stock
          were used to pay down the line of credit.









                                       11

<PAGE>   12



     The semiconductor industry is extremely competitive, and is characterized
by rapid technological change, evolving industry standards, changing market
conditions and frequent new product introductions and enhancements. The
introduction of products embodying new technologies or standards can render
existing products or products under development obsolete or unmarketable. Many
of the Company's competitors have more extensive engineering, manufacturing,
marketing, financial and personnel resources than those of the Company.
Accordingly, the Company's success in implementing its strategy to focus on the
audio semiconductor business will depend in large part on its ability to
anticipate industry changes and to develop and introduce new products on a
timely basis. Development and customer acceptance of new products is inherently
uncertain, and there can be no assurance that the Company will successfully
complete the development of its advanced audio products or technologies on a
timely basis or that such products or technologies will be commercially
successful.

RESULTS OF OPERATIONS

     Net Sales

     Net sales for the second quarter of 1997 were $0.7 million, compared to
$0.4 million in the previous quarter and $0.5 million in the second quarter of
1996. Revenues for both quarters in 1997 consisted primarily of revenues from
licensing transactions. Aureal Semiconductor now has 3D audio technology ("A3D")
license agreements in place with the following companies:

                  Analog Devices Inc.
                  ATI Technologies Inc.
                  Cirrus Logic Inc.
                  Diamond Multimedia Systems Inc.
                  Oak Technology, Inc.
                  Rockwell Semiconductor Systems
                  S3 Incorporated

     No revenues were recorded in the first two quarters of 1996 with respect to
any of these licensing agreements. The Company has licensed some of its audio
technology to third parties with the expectation that such technology be
incorporated into the third parties' semiconductor products. Such revenues,
generally in the form of per-unit royalties are recognized upon reported sales
of licensed units. No significant continuing obligations or delivery
requirements exist with respect to the licenses.

     In July 1997, the Company announced the availability of pre-production
samples of the Vortex AU8820, a PCI-based AC '97 Digital Audio Processor. The
product is the first in a series of single-chip devices based on an architecture
which has been under development at Aureal for two years. Production quantities
are anticipated in the fourth quarter of 1997. Earlier in the year, the company
announced production availability for two of its new semiconductor products: the
VSP901 Single-Chip Dolby Pro Logic Virtual Surround Processor, and the ASP321
Karaoke Processor.

     Net sales in the first half of 1996 totaled $3.0 million consisting
primarily of revenues from licensing transactions embodying pre-existing legacy
audio technology. The Company does not anticipate significant future revenues
from this legacy audio technology.

     Gross Margin

     In the second and first quarters of 1997, gross margin totaled $0.7 million
and $0.4 million, respectively. This compares to $0.4 million and $2.4 million
for the same periods last year. All gross margin figures reflect the large
percentage of net sales represented by licensing transactions. The vast majority
of costs related to technology licensing are recorded as research and
development costs during the development period of the technology. Relatively
little current cost is connected directly with the sales, thus producing
relatively high gross margin percentages. Margin percentages are expected to
move downward in the future as semiconductor products become a more significant
component of revenue. The lower margin on semiconductor products, relative to
licensing, reflects the current cost of producing physical product for sale.









                                       12

<PAGE>   13



     Research and Development

     Research and development expenditures for the quarter increased to $1.6
million from $1.4 million in the first quarter of 1997 ($3.0 million
year-to-date). The $3.0 million year-to-date figure represents a decrease from
the comparable 1996 amount of $3.3 million. This change was primarily due to two
factors. First, 1996 included significant expenses related to the purchase of
specialized technology to be incorporated into future products. The second
factor was a transfer of technical personnel from Research and Development to
Marketing during the first half of 1996.

     The Company expects the level of spending on research and development will
increase in dollars in future periods.

     Selling and Marketing

     Selling and marketing expenses for the second quarter of 1997 were $0.9
million. This was an increase from both the previous quarter and the second
quarter of the previous year, at $0.8 million and $0.3 million, respectively.
The increase in year-to-date expenses of $1.7 million for 1997 over year-to-date
expenses of $0.4 million in 1996 occurred primarily in the areas of market and
product development. This buildup in marketing efforts over last year included
both increased staffing and increased spending on public relations and
promotional activities. Selling and marketing expenses are expected to generally
rise over the long term as travel, promotion and marketing costs increase as
Aureal spends more time with customers, and sales commissions increase with
higher sales volumes.

     General and Administrative

     General and administrative expenses for the quarter ended June 29, 1997
were $0.6 million, remaining flat from the first quarter of 1997. This constant
level of expenditures reflected continued cost containment efforts for this area
of the Company. Quarterly ($0.6 million) and year-to-date ($1.2 million) figures
for 1997 are slightly lower than comparable quarterly ($0.7 million) and
year-to-date ($1.3 million) figures for 1996. General and administrative costs
are anticipated to increase in future quarters in support of the Company's
activities as product shipments increase.

     Amortization of Reorganization Asset

     The Reorganization Asset originated pursuant to the Company's valuation
upon its exit from bankruptcy protection on December 30, 1994 whereby the fair
value of the Company exceeded its net assets by $44.1 million. The
Reorganization Asset initially was being amortized over three years at the rate
of $3.7 million per fiscal quarter. During the second quarter of 1995, it was
determined that a significant portion of the Reorganization Asset could no
longer be assured of recovery and a $30.5 million write-off was recorded. The
remaining Reorganization Asset value is being amortized through 1997 at the rate
of $625,000 per fiscal quarter.

     Interest Expense

     Interest expense for the first half of both years consisted primarily of
interest on the line of credit at the rate of prime plus 5%. Interest expense
for the two quarters ended June 29, 1997 totaled $1.2 million, compared to $1.5
million for the first two quarters of 1996. Equity funding totaling $22 million
in the first half of 1996 was utilized to both fund current working capital
needs and pay down the line of credit. The reduction in the average debt balance
outstanding reduced interest expense in the first half of 1997. The balance on
the line of credit is expected to increase over future fiscal quarters as it is
utilized as a source of working capital.








                                       13


<PAGE>   14

     Interest Income and Other Income

     Interest income for the first two quarters of 1996 was $137,000 consisting
primarily of interest on funds received from the private placements of common
stock in February and March of 1996. Terms of the private placement transactions
placed certain restrictions on the Company's ability to use the proceeds to
reduce the outstanding balance on the line of credit. The invested cash declined
during 1996 as it was utilized for ongoing costs of operations, as well as for
the acquisition of CRE. Cash balances were at a minimum throughout the first
half of 1997, as a result, interest income was not significant.

     The Company recognized net other income of $145,000 and $53,000 in the
second and first quarter of 1997, respectively. This compares to $16,000 and
$181,000 in the corresponding quarters of 1996. The income recognized in all
quarters shown was primarily due to various refunds and settlement receipts
relating to the old retail business, but also resulted from the sale of assets
and recovery of property loss insurance proceeds.

     Income Taxes

     The Company was not required to provide income taxes in the first two
quarters of either 1997 or 1996 due to its net operating losses. No tax benefit
has been recorded for the loss due to the uncertainty as to its realizability.

LIQUIDITY AND CAPITAL RESOURCES

     The net cash flow requirements for the Company have been running in excess
of $1 million per month. The primary factor is the outflow from cash-based
operating expenses, without significant inflow from the cash receipt of revenue
dollars. In addition, the Company anticipates the need to expand the business
with the manufacture of products (through outside foundries) and financing of
customer receivables as sales of semiconductor products are anticipated to
increase in 1997. Working capital to provide for this growth is expected to be
provided primarily from the Company's working capital line of credit.
Estimations of cash flows from operations are inherently difficult for a company
just commencing sales.

     The Company believes that the $31.5 million line of credit, of which $16.1
million was available for borrowings as of August 6, 1997, will provide adequate
financial resources to sustain business for at least the next year. The Company
may be required to seek additional financing to expand its business. There can
be no assurance that the Company will be able to generate positive cash flows in
the future or to obtain financing on favorable terms, if at all.

     Capital expenditures of $50,000 during the second quarter of 1997, and
$179,000 for the first two quarters ended June 29, 1997 consisted primarily of
hardware and software tools utilized in the Company's research and development
activities. Increased levels of capital expenditures are anticipated during
future quarters of 1997, but are not expected to be significant.

     The terms of the line of credit, as amended in August 1997, provide for a
maturity date of March 31, 1999. In addition, the Company has an option to
extend the due date an additional year, to March 31, 2000. Borrowings under the
line of credit are secured by substantially all assets of the Company, and bear
interest at the rate of prime plus 5% per annum. The maturity date (originally
March 1, 1995) and the total availability under the line (ranging from $10
million to $31.5 million to date) have been negotiated periodically with TCW. As
of August 6, 1997, $15.4 million was outstanding under the line, with $16.1
million available for further borrowing. The line of credit lenders include
entities affiliated with TCW Special Credits and DDJ Capital Management LLC. As
of August 6, 1997 these entities controlled approximately 44% and 16% of the
outstanding common stock, respectively.





                                       14

<PAGE>   15

     RISK FACTORS

     In evaluating the Company's business, the following factors should be
considered in addition to the other information in this Form 10-Q.

     Emerging Technology - Product Concentration

     The primary technology for the Company's existing and future products is
new and emerging in the marketplace. The Company is working to set standards for
3D audio in both the PC and consumer electronics markets. There is no assurance
that the markets will develop and recognize the value of the Company's products,
or that such events will occur over a time period to allow the Company to
successfully participate in the markets' anticipated growth.

     In addition, the Company is seeking to compete in an area of rapid
technological change and potentially short product life cycles. The Company must
develop, market and sell products in time frames appropriate to the marketplace.
The Company expects that potential competition may come from companies who have
financial and other resources significantly greater than those of the Company.

     Need for Foundry Access

     The Company is a "fabless semiconductor firm" which depends on outside
manufacturing resources for production of its semiconductor products. As such,
the Company places a high value on maintaining strong relationships with
potential manufacturing sources. The Company believes it has access to
sufficient foundry capacity to provide manufacturing resources for its currently
anticipated products. This capacity is subject to overall industry demand as
well as individual factors which can impact any specific manufacturer's ability
or intention to provide product manufacturing resources to the Company. There is
no assurance that the Company can continue to obtain sufficient foundry
capacity, or maintain such capacity at acceptable costs.

     Dependence on Personnel

     The Company is highly dependent upon continued services of key engineering,
marketing, sales and management personnel. The Company's employees may
voluntarily terminate their employment with the Company at any time. The
competition for such employees is intense and the loss of their services could
have a material adverse effect on the Company's business.

     Proprietary Rights and Related Litigation

     The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary technology. Although the Company continues to
implement protective measures and intends to defend its proprietary rights,
there can be no assurance that measures to deter or prevent unauthorized use of
the Company's technology will be successful. The Company relies on a combination
of copyright and trade secret protection, nondisclosure agreements and licensing
arrangements to establish and protect its proprietary rights. In addition, the
Company has patents issued and patent applications pending in the United States
and in foreign countries and intends to file additional applications as
appropriate for patents covering its technologies and products. There can be no
assurance that patents will issue from any of these pending applications, or, if
patents do issue, that any claims allowed will be sufficiently broad to protect
the Company's technology. There can also be no assurance that any patents that
may be issued to the Company will not be challenged, invalidated or
circumvented, or that any rights granted thereunder would provide proprietary
protection to the Company. In addition, the laws of certain foreign countries
may not protect the Company's proprietary rights to the same extent as do the
laws of the United States.

     From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. Although
the Company does not believe that its products infringe the proprietary rights
of any third parties, there can be no assurance that infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) will
not be asserted against the Company or that any such assertions will not
materially adversely affect the Company's business, financial condition or
results of operations. Irrespective of the validity or the successful assertion
of such claims, the Company could incur significant cost and diversion of
management efforts with respect to the defense thereof which could have a
material adverse effect on the Company's business, financial condition or
results of operations.







                                       15

<PAGE>   16

PART II.  OTHER INFORMATION

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

     The Annual Meeting of Stockholders was held on May 21, 1997 at which the
stockholders voted on proposals as follows:


<TABLE>
<CAPTION>
                                                                        Number of Shares
                                                                 Voted For                 Withheld
                                                                 ---------                 --------
<S>                                                              <C>                        <C>   
     Election of Directors:
              D.   Richard Masson                                29,487,025                 19,214
              Richard E. Christopher                             29,444,525                 61,714
</TABLE>



<TABLE>
<CAPTION>
                                                                   Voted For              Voted Against        Abstained
                                                                  ---------              -------------        ---------
<S>                                                               <C>                    <C>                   <C>   
     Approval of the Company's 1996 Outside
     Directors Stock Option Plan                                  29,227,131                 220,567             58,541

     Ratification of appointment of Arthur Andersen, 
     LLP as independent accountants of the Company for
     the next fiscal year ending December 28, 1997                29,477,803                  13,256             15,180
</TABLE>




ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

    (a)   Exhibit index at page 17.
    (b)   Reports on Form 8-K:
         The Company filed no reports on Form 8-K during the second quarter
ended June 29, 1997.


                                   SIGNATURES



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



                                         AUREAL SEMICONDUCTOR INC.




Date:    August 6, 1997                  By: /s/Kenneth A. Kokinakis
                                            ----------------------------------
                                         Kenneth A. Kokinakis
                                         President and Chief Executive Officer


Date:    August 6, 1997                  By: /s/David J. Domeier
                                            ----------------------------------
                                         David J. Domeier
                                         Vice President of Finance
                                         Chief Financial Officer











                                       16


<PAGE>   17

                                  EXHIBIT INDEX


Exhibit No.                       Description of Document
-----------                       -----------------------


2.1            Agreement and Plan of Reorganization among the Company, Aureal
               Acquisition Corporation, a wholly-owned subsidiary of the Company
               and Crystal River Engineering, Inc., dated as of May 7, 1996 (1)
         
2.2            Second Amended Joint Plan of Reorganization dated November 10,
               1994 (4)
         
3.1            Second Amended and Restated Certificate of Incorporation of the
               Company dated May 8, 1996 (2)
         
3.2            Restated Bylaws of Aureal Semiconductor Inc. (6)
         
4.1            Common Stock Purchase Agreement by and among the Company and
               certain beneficial owners of 5% or more of the Company's Common
               Stock, as amended (3)
         
4.2            Common Stock Purchase Agreement by and among the Company and
               certain entities and individuals dated June 10, 1996 (5)
         
10.1           Amended and Restated Loan Agreement dated as of December 30, 1994
               with TCW Special 10.1 Credits, and the First Amendment thereto
               dated March 22, 1995 (4)
         
10.2           Second Amendment to Amended Restated Loan Agreement dated as of
               July 24, 1995 (3)
         
10.3           Third Amendment to Amended and Restated Loan Agreement dated as
               of February 16, 1996 (3)
         
10.4           Letter Agreement between TCW Special Credits and the Company
               dated June 5, 1996 reducing loan commitment from $22 million to
               $20 million (6)
         
10.5           1995 Stock Option Plan (3)
         
10.6           Form of incentive option agreement and non-statutory stock option
               agreement used under 1995 Stock Option Plan (3)
         
10.7           1994 Stock Option Plan (4)
         
10.8           Form of incentive option agreement and non-statutory stock option
               agreement used under 1994 Stock Option Plan (4)
         
10.10          Industrial Space Sublease with Chemical Waste Management, Inc.
               dated September 13, 1995 (3)
         
10.12          Form of Indemnity Agreement for Directors and Officers (6)
         
10.13          1996 Outside Directors Stock Option Plan (7)
         
11.1           Computation of Earnings (Loss) Per Share (See Pages 5 and 9)
         
27.1           Financial Data Schedule (Edgar Only)
         











                                       17



<PAGE>   18

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

(1)  Incorporated by reference to the exhibits filed with Form 8-K dated May 22,
     1996.

(2)  Incorporated by reference to the exhibits filed with Form S-8 (Registration
     number 333-09531) filed August 2, 1996.

(3)  Incorporated by reference to the exhibits filed with Form 10-K for the year
     ended December 31, 1995.

(4)  Incorporated by reference to the exhibits filed with Form 10-K for the year
     ended December 31, 1994.

(5)  Incorporated by reference to the exhibits filed with Form S-3 (Registration
     number 333-3870) filed June 26, 1996.

(6)  Incorporated by reference to the exhibits filed with Form 10-Q for the
     quarter ended September 29, 1996. 

(7)  Incorporated by reference to the exhibits filed with Form 10-K for the 
     year ended December 29, 1996.




















                                       18