<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 MARCH 30, 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
                                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 May 2, 1997, 39,447,281 shares of common stock, $0.001 par value, of the
registrant were outstanding.

This report on Form 10-Q contains 20 pages. The exhibit index is on page 19.



<PAGE>   2


                            AUREAL SEMICONDUCTOR INC.


                                    FORM 10-Q

                                Table of Contents

<TABLE>
<CAPTION>
                                                                                                  Page
<S>                                                                                                 <C>
PART I.  FINANCIAL INFORMATION
           Item 1.  Financial Statements .....................................................       3
           Item 2.  Management's Discussion and Analysis of Financial Condition and Results of
                      Operations .............................................................      12

PART II.  OTHER INFORMATION
           Item 1.   Legal Proceedings .......................................................      17
           Item 5.   Other Information .......................................................      17
           Item 6.   Exhibits and Reports on Form 8-K ........................................      17
</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 March 30, 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>
                                                                          March 30,     December 29,
                                                                           1997            1996
                                                                        ------------    ------------
                                                                         (Unaudited)
<S>                                                                       <C>             <C>      
ASSETS:

   Current assets:
        Cash and cash equivalents                                         $       8       $      18
        Restricted cash                                                         100            --
        Accounts receivable                                                     151              63
        Inventories                                                             195              74
        Prepaid expenses and other current assets                               295             403
                                                                          ---------       ---------
             Total current assets                                               749             558
   Property and equipment:
        Machinery and equipment                                               2,725           2,596
        Furniture, fixtures and improvements                                    914             914
                                                                          ---------       ---------
                                                                              3,639           3,510
        Accumulated depreciation and amortization                            (2,683)         (2,518)
                                                                          ---------       ---------
             Net property and equipment                                         956             992

   Reorganization Asset, less accumulated amortization
        of $11,721 in 1997 and $11,096 in 1996                                1,875           2,500
   Other assets                                                                  84              95
                                                                          ---------       ---------
             Total assets                                                 $   3,664       $   4,145
                                                                          =========       =========


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):

   Current liabilities:
        Accounts payable                                                  $     545       $     670
        Accrued compensation and benefits                                       999           1,278
        Other accrued liabilities                                             1,274           1,229
        Current portion of pre-petition claims                                  898             881
                                                                          ---------       ---------
             Total current liabilities                                        3,716           4,058

   TCW Credit Facility                                                       13,760          10,325
   Long-term portion of pre-petition claims and deferred obligations          5,245           5,523
                                                                          ---------       ---------
             Total liabilities                                               22,721          19,906
                                                                          ---------       ---------

   Stockholders' equity (deficit):
        Common stock, $0.001 par value:
             Authorized shares - 100,000,000; Issued and outstanding
             shares - 39,439,138 in 1997 and 39,190,795 in 1996                  39              39
        Additional paid-in capital                                          105,241         105,053
        Accumulated deficit                                                (124,337)       (120,853)
                                                                          ---------       ---------
             Total stockholders' equity (deficit)                           (19,057)        (15,761)
                                                                          ---------       ---------

             Total liabilities and stockholders' (deficit)                $   3,664       $   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
                                                 ------------------------
                                                  March 30,     March 31,
                                                    1997          1996
                                                 ----------     ---------
                                                       (Unaudited)
<S>                                               <C>            <C>     
Net sales                                         $    427       $  2,532
Cost of sales                                           20            119
                                                  --------       --------
Gross Margin                                           407          2,413

Operating expenses:
      Research and Development                       1,438          1,617
      Sales and Marketing                              778            150
      General and Administrative                       584            554
      Amortization of Reorganization Asset             625            625
                                                  --------       --------
           Total operating expenses                  3,425          2,946
                                                  --------       --------

Operating loss                                      (3,018)          (533)

      Interest income                                    3             65
      Interest expense                                (522)          (785)
      Other income (expense)                            53            181
                                                  --------       --------
Loss from operations before income taxes            (3,484)        (1,072)

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

Net loss                                          $ (3,484)      $ (1,072)
                                                  ========       ========

Net loss per share                                $   (.09)      $  (0.05)
                                                  --------       --------

Shares used in calculating per share amounts        39,304         23,242
                                                  ========       ========
</TABLE>


                             See accompanying notes.



                                       5
<PAGE>   6
AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             Quarter Ended
                                                       ------------------------
                                                         March 30,     March 31,
                                                           1997          1996
                                                        ----------     ---------
                                                              (Unaudited)
<S>                                                       <C>           <C>      
OPERATING ACTIVITIES
Net loss from operations                                  $(3,484)      $ (1,072)
Adjustments to reconcile net loss from operations
  to net cash used in operating activities:
      Depreciation and amortization                           801            780
      Changes in operating assets and liabilities:
           Restricted cash                                   (100)          --
           Accounts receivable                                (88)            10
           Inventories                                       (121)           101
           Prepaid expenses and other current assets          108           (128)
           Other assets                                      --               26
           Accounts payable                                  (125)          (456)
           Accrued compensation and benefits, and
             other accrued liabilities                       (224)        (1,786)
                                                          -------       --------
Net cash used in operating activities                      (3,233)        (2,525)
                                                          -------       --------

INVESTING ACTIVITIES
Acquisition of property and equipment                        (129)           (28)
                                                          -------       --------
Net cash used in investing activities                        (129)           (28)
                                                          -------       --------

FINANCING ACTIVITIES
Proceeds from TCW Credit Facility                           3,535          1,883
Repayment on TCW Credit Facility                             (100)        (1,633)
Principal payments on pre-petition claims                    (261)          (205)
Proceeds from issuance of common stock, net of
  issuance costs                                              178          9,993
                                                          -------       --------
Net cash provided by financing activities                   3,352         10,038
                                                          -------       --------

Net increase (decrease) in cash and cash equivalents          (10)         7,485
Cash and cash equivalents at beginning of period               18             22
                                                          -------       --------
Cash and cash equivalents at end of period                $     8       $  7,507
                                                          =======       ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                             $   383       $  1,388
</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 plan combines the
development and sale of audio processing semiconductor chips as well as
technology licensing agreements designed to define and maintain audio standards
in the marketplace.

      The Company maintains a $20 million line of credit with a current
expiration date of March 31, 1998. The Company's current projections indicate
that there will not be sufficient cash flow from operations to fund that
obligation. The Company plans to negotiate with the lender during 1997 to
refinance or otherwise extend the line. The Company's ability to continue
operations is dependent on refinancing that line or obtaining replacement
financing. There can be no assurance that extension or renegotiation of the
credit line will occur or that replacement financing can be obtained.

      As of March 30, 1997, the Company had a working capital deficit of $3.0
million and shareholders' deficit of $19.1 million. 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 (See Note 4). Estimations of cash flows from
operations are inherently difficult for a company just commencing sales. The
Company expects to require financing, in addition to the availability under its
TCW Credit Facility, during 1997 to support its growth. The Company is currently
considering various financing options, including additional equity
capitalization. The Company's primary lender and largest shareholder, TCW, has
expressed its commitment to provide funds to support the cash flow requirements
of the Company's current business plan at least through fiscal 1997. If the
Company finds it necessary to materially alter its business plan, financing to
provide for its cash flow requirements may not be available from TCW or others.

      Prior to August 1995, the Company derived substantially all of its
revenues from the design, development and sale of multimedia add-in systems for
PCs marketed through electronics retailers and distributors. At that time, 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 sold the Media Vision brand name, related trade names and
other assets of its previous retail products business to a third party. The
sales agreement transferred the retail customer service and technical support
obligations to the buyer. It also provided for a royalty stream on sales made
under the Media Vision brand name, which commenced during the first quarter of
1997, and a commitment by the buyer to purchase products incorporating the
Company's current advanced audio solutions for the PC market.

      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.

      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 credit facility and to
partially fund the acquisition of CRE (see below). In conjunction with this
equity infusion, the total availability under the Company's line of credit was
reduced from $22 million to $20 million.




                                       7
<PAGE>   8


      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 early September 1996, the Company introduced Aureal 3D, 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 announced production availability for the VSP901 Single-Chip
Dolby Pro Logic Virtual Surround Processor in January 1997. The Company also
signed a licensing agreement with Analog Devices Inc. for Aureal's "A3D
Interactive" technology.

      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 was both incorporated in titles
released by leading game developers and supported under Microsoft's new
DirectSound 5.0 standard.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Basis of Presentation

      The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Certain reclassifications have
been made to the prior period financial statements to conform to the March 30,
1997 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 ended March 30, 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.




                                       8
<PAGE>   9
      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 March 30, 1997, $100,000
in restricted cash deposits 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.

      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 the quarter ended March 30, 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 for the year. 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.
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 both the first quarter of 1997 and the first
quarter of 1996, would not differ from the amounts stated.



                                       9
<PAGE>   10
      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 to
in the second quarter of 1995 as the Company exited the retail products
business. The net remaining Reorganization Asset of $1,875,000 as of March 30,
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 which was recorded on the Company's books.
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 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. The Company plans to
incorporate the CRE 3D audio technology into a number of its future products.

4.    TCW CREDIT FACILITY

      The Company maintains a line of credit, with a current maturity date of
March 31, 1998, with certain entities managed by TCW Special Credits, an
affiliate of the TCW Group, Inc. ("TCW"). The maturity date (originally March 1,
1995) and the total availability under the line (ranging from $10 million to $22
million to date) have been negotiated periodically with TCW. In conjunction with
the private placement of equity, finalized in June 1996, the line of credit was
reduced from $22 million to $20 million. 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 March 30, 1997) plus five percent. At March 30, 1997,
$13.8 million was outstanding under the line. Additionally, as of March 30,
1997, TCW and affiliated entities controlled approximately 45% of the Company's
outstanding common stock.

      The Company's current projections indicate that there will not be
sufficient cash flow from operations to fund the obligation to repay the debt
upon its current maturity date of March 31, 1998. The Company plans to negotiate
with the lender during 1997 to refinance or otherwise extend the line. The
Company's ability to continue operations is dependent on refinancing that line
or obtaining replacement financing. There can be no assurance that such
extension or renegotiation of the credit line will occur or that replacement
financing can be obtained.

      The Company is prohibited from declaring or paying cash dividends on its
capital stock under the terms of the TCW line of credit.



                                       10
<PAGE>   11

5.    INCOME TAXES

      The Company was not required to provide for income taxes in the first
quarter 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.




                                       11
<PAGE>   12

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 NEW TECHNOLOGY,
FOUNDRY CAPACITY AND RELIABILITY; DEPENDENCE ON THE PC AND CONSUMER ELECTRONICS
INDUSTRIES AND ON A PRODUCT LINE BASED ON A NEW TECHNOLOGY; COMPETITION AND
PRICING PRESSURES; THE NEED FOR ADDITIONAL FINANCING TO SUPPORT FUTURE GROWTH,
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 legacy audio technologies stem from its prior business as a
developer and manufacturer (on a contract basis) of multimedia sound cards and
peripheral upgrade kits for the retail PC marketplace. The Company was active in
that business from its founding in 1990 through mid-1995 (operating under the
name Media Vision Technology Inc.) when it announced its intention to exit that
marketplace to concentrate all of its resources on the development of advanced
audio technologies for use by the OEM (Original Equipment Manufacturer)
marketplace. Both revenues and expenses during the first quarter of 1996 pertain
to the Company's exit from the retail PC upgrade kit market. This contrasts with
the first quarter of 1997, where operating results reflect the start-up of the
Company's business plan to design and market advanced audio semiconductor
technologies to both PC and consumer electronics OEMs.

      During 1996 and the first quarter of 1997, a number of significant changes
took place in the Company's business. 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 sold the Media Vision
                brand name, related trade names and other assets of its previous
                retail products business to a third party. The sales 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. In conjunction with this equity
                infusion, the total availability under the Company's line of
                credit was reduced from $22 million to $20 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.

      The Company's current strategy combines the development and sale of audio
processing semiconductor chips, along with technology licensing agreements with
companies strategic to the definition and maintenance of high quality audio
standards in the marketplace. The Company has signed licensing agreements with a
number of companies providing for the inclusion of Aureal's A3D Interactive
technologies in licensee's products. The first two of these products were
introduced in the first quarter of 1997, however further product releases and
availability dates are dependent upon each licensee's abilities to develop and
release products.



                                       12
<PAGE>   13
      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 first quarter of 1997 were $0.4 million consisting
primarily of revenues from licensing transactions. The Company has entered into
3D audio technology ("A3D") licenses with Diamond Multimedia Systems Inc., Oak
Technology, Inc., Analog Devices Inc. and Rockwell Semiconductor Systems. No
revenues were recorded in the first quarter of 1996 with respect to any of these
transactions. 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.

      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 during the first quarter of 1997.
Since these products only became available for the first time this quarter,
their contribution to first quarter revenues was minimal.

      Net sales in the first quarter of 1996 totaled $2.5 million consisting of
revenues from both licensing transactions and sales of semiconductor products
embodying pre-existing legacy audio technology. The Company does not anticipate
significant future revenues from this legacy audio technology.

      Gross Margin

      Gross margin of $0.4 million in the first quarter of 1997 and $2.4 million
for the first quarter of 1996 both represented 95% of sales. In both years, this
resulted from 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. As the Company markets
its semiconductor products, margin percentages will move downward to reflect the
current cost of producing physical product for sale.

      Research and Development

      Research and development expenditures decreased slightly at $1.4 million
in the first quarter of 1997 compared to $1.6 million in the first quarter of
1996. The change was primarily due to two factors. First, 1996 included
significant expenses related to both the purchase of design work from outside
companies, and the purchase of support tools for the in-house development staff,
neither of which occurred to the same extent in the first quarter of 1997. 
The second factor is a transfer of technical personnel from Research and 
Development to Marketing during the first half of 1996. The purpose was to 
strengthen the newly formed Marketing and Product Development groups, and to 
move customer specific product development efforts closer to the Sales and 
Marketing staff. The Company expects the level of spending on research and 
development will remain relatively constant or increase in dollars in future 
periods.



                                       13
<PAGE>   14

      Selling and Marketing

      Selling and marketing expenses increased in the comparable first quarters
from $0.2 million in 1996 to $0.8 million in 1997. The increase was expected and
occurred in essentially all areas of sales and marketing. The largest component
of the increased expenses was related to the transfer of technical positions
from Research and Development to Marketing, as discussed above. 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.

      General and Administrative

      General and administrative expenses remained relatively constant in the
comparable first quarters at $0.6 million in both 1996 and 1997. This
stabilization reflected continued cost containment efforts within the Company.
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 quarter of both years consisted primarily
of interest on the TCW Credit Facility at the rate of prime plus 5%. Equity
funding totaling $22 million in the first half of 1996 was utilized to both fund
current working capital needs and pay down the TCW Credit Facility. The
reduction in the debt balance outstanding reduced interest expense in the first
quarter of 1997. The balance on the TCW Credit Facility is expected to increase
over future fiscal quarters as it is utilized as a source of working capital.

      Interest Income and Other Income

      Interest income for the first quarter of 1996 was $65,000 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 TCW Credit Facility. The invested cash
declined during 1996 as it was utilized for ongoing costs of operations, as well
as for the acquisition of CRE. With cash balances at a minimum at the end of the
first quarter of 1997, future interest income is not expected to be significant.

      The Company recognized net other income of $53,000 and $181,000 in the
first quarters of 1997 and 1996 respectively. The income recognized in 1996
resulted primarily from the sale of assets and various VAT refunds and other old
business sources in excess of previously recorded amounts. Other income for the
first quarter of 1997 also results from the sale of assets, various refunds and
miscellaneous other receipts.

      Income Taxes

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




                                       14
<PAGE>   15
LIQUIDITY AND CAPITAL RESOURCES

      As of March 30, 1997, the Company had a working capital deficit of $3.0
million and shareholders' deficit of $19.1 million. Currently, 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 expects to require financing, in addition to the availability
under its TCW Credit Facility, during 1997 to support its growth. The Company is
currently considering various financing options, including additional equity
capitalization. The Company's primary lender and largest shareholder, TCW, has
expressed its commitment to provide funds to support the cash flow requirements
of the Company's current business plan at least through fiscal 1997. If the
Company finds it necessary to materially alter its business plan, financing to
provide for its cash flow requirements may not be available from TCW or others.

      Capital expenditures of $129,000 during the first quarter of 1997
consisted primarily of hardware and software tools utilized in the Company's
research and development activities. Similar levels of capital expenditures are
anticipated during future quarters of 1997.

      The TCW line of credit has a current maturity date of March 31, 1998.
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 July 30, 1995) and the total availability under the
line (ranging from $15 million to $22 million to date) have been negotiated
periodically with TCW. As of May 2, 1997, $15.2 million was outstanding under
the line, with $4.8 million available for further borrowing. In addition, as of
May 2, 1997, TCW owned 45% of the outstanding Common Stock of the Company.

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 anticipated products is new and
emerging in the marketplace. The Company is working to set standards for new
product category of 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.



                                       15
<PAGE>   16
      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. Such foundry relationships can take many forms,
and the company is constantly exploring the expansion of existing relationships.
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 certain issued patents 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.




                                       16
<PAGE>   17


PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

      In August 1995, Creative Technology, Ltd. ("Creative") filed a Complaint
against the Company in the Superior Court of Alameda County, California,
Creative Technology, Ltd. v. Media Vision, Inc., No. 755609-1, in which Creative
alleged that the Company breached a Licensing and Settlement Agreement executed
in August and September 1992 in connection with settlement and dismissal of
earlier litigation between Creative and the Company. In the Complaint, Creative
demanded that the court order the Company to cease using, licensing and selling
certain software rights and products that are and/or contain what is allegedly
the property of Creative. Creative further demanded that the court impose a
constructive trust, for delivery to Creative, upon any revenues realized by the
Company from the unauthorized use, sale or license of this technology and/or
products. On December 18, 1995, the Company filed its Answer to the Complaint,
generally denying its allegations. In January 1997, Creative filed a motion to
dismiss the Complaint. The Court approved Creative's motion to dismiss this
matter without prejudice on January 31, 1997.

      In October 1996, a counterclaim was filed by the Company's prior auditors,
Ernst & Young LLP ("E&Y") naming the Company as a third-party defendant in a
lawsuit involving the Company's prior creditors and E&Y. The third-party
complaint sought indemnification and contribution from the Company for lawsuits
filed against E&Y resulting from pre-bankruptcy activities. The Company believes
that any such alleged obligations were discharged by bankruptcy court
confirmation of the Company's Plan of Reorganization in 1994. On February 28,
1997, a motion for summary judgment was awarded in favor of the Company.

ITEM 5.         OTHER INFORMATION

ITEM 6.         EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibit index at page 19.

      (b)   Reports on Form 8-K:

           The Company filed no reports on Form 8-K during the first quarter
ended March 30, 1997.





                                       17
<PAGE>   18

                                   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:      May 7, 1997                    By: /s/Kenneth A. Kokinakis
                                              -----------------------
                                          Kenneth A. Kokinakis
                                          President and Chief Executive Officer


Date:      May 7, 1997                    By: /s/David J. Domeier
                                              -------------------
                                          David J. Domeier
                                          Vice President of Finance
                                          Chief Financial Officer



                                       18
<PAGE>   19
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.                         Description of Document
-----------                         ------------------------
<S>                 <C>
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 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)
        
10.11               Offer Letter Agreement with Kenneth A. Kokinakis dated
                    December 8, 1995 (3)
        
10.12               Form of Indemnity Agreement for Directors and Officers (6)
        
10.13               1996 Outside Directors Stock Option Plan (7)
</TABLE>




                                       19
<PAGE>   20

<TABLE>
<CAPTION>
Exhibit No.                      Description of Document
-----------                      ------------------------
<S>                 <C>
11.1                Computation of Earnings (Loss) Per Share (See Page 5)
        
27.1                Financial Data Schedule (Edgar Only)
</TABLE>
 
-------------------- 

(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




                                       20