AUREAL SEMICONDUCTOR INC, S-3, 1999-04-02

AUREAL SEMICONDUCTOR INC
S-3, 1999-04-02
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 1999

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AUREAL SEMICONDUCTOR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 94-3117385
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

4245 TECHNOLOGY DRIVE
FREMONT, CALIFORNIA 94538
(510) 252-4245
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

DAVID J. DOMEIER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
AUREAL SEMICONDUCTOR INC.
4245 TECHNOLOGY DRIVE
FREMONT, CALIFORNIA 94538
(510) 252-4245
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

JAMES M. KOSHLAND, ESQ.
DAVID A. HUBB, ESQ.
GRAY CARY WARE & FREIDENRICH LLP
400 HAMILTON AVENUE
PALO ALTO, CALIFORNIA 94301-1825
(650) 328-6561

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. #

CALCULATION OF REGISTRATION FEE

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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
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Common Stock ($0.001 par value )... 33,333,333 $0.60 $20,000,000 $5,560
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Rights to purchase Common Stock,
par value $0.001 per share....... 33,333,333 $0 $0 $0
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</TABLE>

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY
DETERMINE.
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SUBJECT TO COMPLETION, DATED , 1999

33,333,333 RIGHTS TO PURCHASE COMMON STOCK

33,333,333 SHARES

AUREAL SEMICONDUCTOR INC.

COMMON STOCK
$0.60 PER SHARE

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Aureal Semiconductor Inc. is offering 33,333,333 shares of common stock to
all of our stockholders who owned shares of our common stock on ,
1999. You will receive, at no cost, a right to buy one share of common stock at
a price of $0.60 for every shares of common stock that you owned on
, 1999. This right is called the basic subscription privilege. We
will not issue fractional rights, and we will not pay cash in place of rights.
If you exercise all of your rights, you also may request to buy additional
shares of common stock at the same price as the basic subscription privilege.
This right is called the over-subscription privilege.

The subscription rights are exercisable beginning on the date of this
prospectus and continuing until 5:00 p.m., Eastern Daylight Savings Time on
, 1999. If you want to participate in the rights offering, we
recommend that you submit your subscription documents to the subscription agent
before that deadline or to your broker or bank at least 10 days before that
deadline. Please see page 16 for further instructions on submitting
subscriptions. All subscriptions will be held in escrow by our subscription
agent, ChaseMellon Shareholders Services, through the expiration date of the
rights offering. We reserve the right to cancel the rights offering at any time
before the expiration date.

There is no minimum number of shares that we must sell in order to complete
the rights offering. Stockholders who do not participate in the rights offering
will continue to own the same number of shares, but will own a smaller
percentage of the total shares outstanding to the extent that other stockholders
participate in the rights offering. Your subscription rights are not
transferable. The subscription rights will not be listed for trading on any
stock exchange.

Oaktree Capital Management LLC, a major stockholder of Aureal, has
committed to subscribe for any shares of common stock that are not subscribed
for by our other stockholders up to a total value of $20,000,000.

Our common stock is quoted on the Over-the-Counter Electronic Bulletin
Board under the symbol "AURL."

INVESTING IN OUR SECURITIES INVOLVES CERTAIN RISKS. PLEASE SEE "RISK
FACTORS" BEGINNING ON PAGE 5 FOR A DESCRIPTION OF SOME OF THESE RISKS.

The shares have not been approved by the SEC or any state securities
commission, nor have these organizations determined that this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SEC
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
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TABLE OF CONTENTS

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PAGE
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PROSPECTUS SUMMARY.................. 1
RISK FACTORS........................ 5
WHERE YOU CAN FIND MORE
INFORMATION....................... 12
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS........ 13
USE OF PROCEEDS..................... 13
</TABLE>

<TABLE>
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PAGE
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PRINCIPAL STOCKHOLDERS.............. 13
THE RIGHTS OFFERING................. 16
FEDERAL INCOME TAX CONSIDERATIONS... 22
LEGAL MATTERS....................... 24
EXPERTS............................. 24
</TABLE>

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PROSPECTUS SUMMARY

This section summarizes the information contained in this prospectus. You
should read the following summary together with the information set forth under
the heading "Risk Factors."

BACKGROUND AND PURPOSE OF THE RIGHTS OFFERING

The purpose of the rights offering is to raise funds for working capital
and general purposes and to reduce our outstanding debt. However, the rights
offering is also an integral part of the recapitalization of Aureal. On March
18, 1999, a special committee of disinterested directors approved the following
matters:

- this rights offering;

- adjustment in the conversion price of the series B preferred stock from
$2.50 per share to $0.90 per share;

- a one-for-fifteen reverse stock split; and

- an increase in the number of shares reserved for issuance under our 1995
Stock Option Plan from 1,666,666 shares to 5,000,000 shares, after giving
effect to the one-for-fifteen reverse stock split.

Immediately following the rights offering and subject to stockholder
approval, we intend to effect the one-for-fifteen reverse stock split whereby
each stockholder will receive one share of our common stock in exchange for
every fifteen shares of our common stock they then hold. We also will be
adjusting the conversion price of the series B preferred stock from $2.50 per
share to $0.90 per share. Upon the adjustment of the conversion price of the
series B preferred stock, Oaktree Capital Management LLC, the only holder of our
series B preferred stock, will convert its shares of series B preferred stock
into shares of our common stock. In exchange for our adjusting the conversion
price of the series B preferred stock, Oaktree has agreed to exercise its
subscription rights to purchase any rights our other stockholders elect not to
acquire.

We expect to hold an annual meeting on May 19, 1999 at our offices in
Fremont, California, to have our stockholders vote on the one-for-fifteen
reverse stock split, the increase in the share reserve under our 1995 Stock
Option Plan, and on other matters.

THE RIGHTS OFFERING

ELIGIBLE STOCKHOLDERS: You will not be eligible to purchase stock
through the rights offering unless you owned
shares of our common stock on ,
1999.

SUBSCRIPTION RIGHTS: If you are an eligible stockholder, you will
have two different subscription rights:

(1) Basic subscription privilege. First, you
will have the right to purchase one share of
our common stock for every shares
of common stock you owned as of
, 1999. The offering price is
$0.60 per share.
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(2) Over-subscription privilege. If you
exercise your basic subscription privilege
in full, you also may offer to buy
additional shares. In exercising this
over-subscription privilege, you should
specify the maximum number of shares of
common stock that you are willing to buy at
$0.60 per share.

In determining the number of shares that we
will issue to each stockholder pursuant to
these rights, we will round up to the
nearest whole number.

ALLOCATION OF SHARES: If we receive subscriptions for more shares
than are being offered, we will first fill
all exercises of the basic subscription
privilege. We will then allocate the
remaining shares among those who exercise
the over-subscription privilege, in
proportion to the maximum number of shares
that each subscriber offers to purchase
within the permitted limit.

EXPIRATION DATE: , 1999, at 5:00 p.m., Eastern
Daylight Savings Time.

SUBSCRIPTION PROCEDURES: To subscribe for shares, you should
carefully complete and sign the subscription
agreement for the rights offering and
forward it to our subscription agent,
ChaseMellon Shareholder Services, whose
address appears below. Be sure to include a
check or money order for the full amount of
your subscription price, unless you elect to
make payment by wire transfer. Checks and
money orders will not be cashed until we
accept your subscription. If your
subscription is accepted in part and
rejected in part, for example, due to over
subscription, the subscription agent will
send you a check for the difference. No
interest will be paid on subscription funds.
ONCE YOU HAVE SUBMITTED SUBSCRIPTION
DOCUMENTS, YOUR EXERCISE OF SUBSCRIPTION
RIGHTS MAY NOT BE REVOKED.

SUBSCRIPTION AGENT: SUBSCRIPTION AGREEMENTS MAY BE DELIVERED TO:

ChaseMellon Shareholder Services, L.L.C.

By mail:
P.O. Box 3301
South Hackensack, N.J. 07606
Attn: Reorganization Department
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By overnight delivery:
85 Challenger Road
Mail Drop-Reorg
Ridgefield Park, N.J. 07660
Attn: Reorganization Department

By hand:
120 Broadway, 13th Floor
New York, N.Y. 10271
Attn: Reorganization Department

PERSONS WISHING TO EXERCISE
RIGHTS FOR THE BENEFIT OF
OTHERS: Brokers, banks, trustees, and other
individuals or entities that hold common
stock for the account of others may, if
authorized by the beneficial owner, complete
the subscription agreement and submit it to
the subscription agent with the proper
payment.

COMPLETION OF THE RIGHTS
OFFERING: Certificates representing shares of the
common stock will be delivered to
subscribers as soon as practicable after the
expiration date of the rights offering. We
expect that this may take two weeks or
longer, due to the need to allow checks to
clear.

NON-TRANSFERABILITY OF RIGHTS: Your subscription rights are not
transferable.

TERMINATION: We may cancel the rights offering at any
time, in which case we will return your
subscription payment without interest.

AGREEMENT WITH PRINCIPAL
STOCKHOLDER: Our principal stockholder, Oaktree Capital
Management LLC, will receive subscription
rights to purchase approximately 19.7
million shares of our common stock. Oaktree
has agreed to exercise its subscription
rights in full. In addition, Oaktree has
agreed to purchase any shares not subscribed
for by our other stockholders up to a total
value of $20,000,000. Upon completion of the
rights offering, Oaktree will own between
73% and 81% of our outstanding common stock
depending on whether other stockholders
exercise their subscription rights and
assuming conversion of all outstanding
preferred stock.

USE OF PROCEEDS: We intend to use the proceeds of the rights
offering to reduce our outstanding debt and
for working capital and general purposes.

RISK FACTORS: An investment in shares of our common stock
involves a high degree of risk. Please see
"Risk Factors" beginning on page 5.
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CERTAIN FEDERAL INCOME TAX
CONSEQUENCES: Your receipt or exercise of the subscription
rights should not be treated as a taxable
event for United States federal income tax
purposes, but may have other tax effects.

QUESTIONS: If you have any questions about the rights
offering, including questions about
subscription procedures and requests for
additional copies of this prospectus or
other documents, please contact ChaseMellon
Shareholder Services, our information agent,
by telephone at 1-800-648-8823.
-------------------------

ABOUT AUREAL

Aureal Semiconductor Inc. is a producer of audio products and advanced
audio technologies for the personal computer and consumer electronics markets.
Our primary business is the sale of audio-related semiconductor and board-level
products and supporting software. We contract with independent silicon foundries
and independent component manufacturers and assemblers for the production of our
semiconductor and board-level products. The foundry that manufactures the
majority of our semiconductor products is one of the three largest foundries in
the world that manufactures products exclusively for other companies. Our
objective is to be a leading provider of advanced digital audio solutions for
the personal computer and consumer electronics markets.

In May 1996, we acquired Crystal River Engineering, Inc., a leader in the
field of 3D audio technology. Crystal River Engineering is now our wholly-owned
subsidiary and offers hardware and software solutions optimized for 3D audio
presentation.

We are headquartered in Fremont, California, in a leased 36,000 square foot
building. In January 1999, we leased an additional 8,000 square feet of office
space in the vicinity. As of January 3, 1999, the last day of our fiscal 1998,
we employed 111 people. Of this total, 74 were engaged in engineering functions,
26 were in sales and marketing activities, and 11 were engaged in administrative
support.

Aureal, Aureal 3D, A3D and the A3D logo are registered trademarks of Aureal
Semiconductor Inc. Other trademarks referred to in this prospectus belong to
their respective owners.
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RISK FACTORS

In addition to the other information in this prospectus or incorporated in
this prospectus by reference, you should consider carefully the following
factors in evaluating Aureal and our business before purchasing the common stock
offered by this prospectus:

RISKS RELATED TO THE RIGHTS OFFERING:

IF YOU DO NOT EXERCISE YOUR SUBSCRIPTION RIGHTS, YOUR PERCENTAGE OWNERSHIP OF
AUREAL WILL DECREASE

If you chose not to exercise your subscription rights, your relative
ownership interests in Aureal will be diluted by the issuance of shares of
common stock to those stockholders who exercise their subscription rights.

THE OFFERING PRICE WAS DETERMINED BY OUR BOARD OF DIRECTORS AND BEARS NO
RELATIONSHIP TO THE VALUE OF OUR ASSETS, FINANCIAL CONDITION OR OTHER
ESTABLISHED CRITERIA FOR VALUE

Our board of directors determined the offering price without any
independent appraisal of the value of the common stock. The price was set at a
substantial discount to the actual trading price of our common stock as of the
date the price was set. This discount is offered as an incentive for our current
stockholders to participate in this offering. The offering price does not
necessarily bear any relationship to the book value of our assets, past
operations, cash flow, earnings, financial condition or any other established
criteria for value and should not be considered an indication of our underlying
value. Our common stock may trade at prices below the offering price at any time
after the date of this prospectus.

AFTER YOU EXERCISE YOUR SUBSCRIPTION RIGHTS, THE TRADING PRICE OF OUR COMMON
STOCK MAY DECLINE

The public trading market price of our common stock may decline before the
subscription rights expire. If you exercise your subscription rights and the
public trading market price of our common stock decreases below $0.60, then you
will have committed to buy shares of common stock at a price above the
prevailing market price. Once you have exercised your subscription rights, you
may not revoke your exercise. Moreover, you may be unable to sell your shares of
common stock at a price equal to or greater than the offering price. Until
certificates are delivered upon expiration of the rights offering, you will not
be able to sell the shares of common stock that you purchase in the rights
offering. We will deliver to you certificates representing shares of the common
stock that you purchased as soon as practicable after expiration of the rights
offering. We will not pay you interest on funds delivered to the subscription
agent pursuant to the exercise of your subscription rights.

YOU CANNOT REVOKE YOUR EXERCISE OF SUBSCRIPTION RIGHTS; WE MAY CANCEL THE RIGHTS
OFFERING AT ANY TIME

Once you exercise your subscription rights, you may not revoke the exercise
for any reason. We may terminate the rights offering at any time. If we elect to
withdraw or terminate the rights offering, neither we nor the subscription agent
will have any obligation

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with respect to the subscription rights except to return, without interest, any
subscription payments.

RISKS RELATED TO AUREAL:

IF WE ANNOUNCE AND EFFECT A ONE-FOR-FIFTEEN REVERSE STOCK SPLIT, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE

Our stock price may decline because we have announced our intentions to
effect a one-for-fifteen reverse stock split. Many companies that have announced
and effected reverse stock splits have seen their stock price fall, both before
and after the reverse split is effected. On March 18, 1999, a special committee
of disinterested directors approved a one-for-fifteen reverse split in our
common stock. While a reverse stock split does not in any way affect the value
of, or your investment in, Aureal, the markets may react negatively to it which
will cause our stock price to decline further. We cannot assure you that, as a
result of the reverse stock split, our stock price will not decline to a price
that is less than fifteen times the price of our stock prior to the reverse
stock split.

WE HAVE SUSTAINED LOSSES IN THE PAST AND WE EXPECT TO SUSTAIN LOSSES IN THE
FUTURE

We emerged from bankruptcy in December 1994. Since that time, we have
recorded an accumulated deficit of $173 million as of January 3, 1999, the end
of our fiscal 1998. This deficit is comprised of $157 million of incurred losses
and $16 million of accretion and dividends on our preferred stock. We generated
the majority of our revenues in 1997 and 1996 through technology licensing
transactions. The majority of our revenues in 1998 came from the sale of
advanced audio products. We expect that the majority of our future revenues will
be derived from the sale of advanced audio products. However, we will not be
profitable unless we sell significant volumes of our advanced audio products in
the future.

OAKTREE CAPITAL CONTROLS A SUBSTANTIAL AMOUNT OF OUR STOCK AND MAY, THEREFORE,
INFLUENCE OUR AFFAIRS

As of the date of this prospectus, Oaktree Capital owns approximately 59%
of our common stock. In addition, Oaktree owns 100% of the outstanding shares of
our series B preferred stock, which, upon adjustment of the conversion price to
$0.90 per share, will convert into approximately an additional 46.6 million
shares of common stock. Oaktree has agreed to convert all of its series B
preferred stock at $0.90 per share immediately following the closing of the
rights offering. Furthermore, in exchange for our agreement to adjust the
conversion price of the series B preferred stock, Oaktree has committed to
purchase all shares offered in the rights offering and not otherwise subscribed
for by our other stockholders. Oaktree will also have the right to subscribe for
at least 19.7 million shares of our common stock pursuant to the rights
offering. Accordingly, Oaktree is, and after the rights offering will be able
to, control all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business
combinations.

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INVESTORS MAY FIND IT DIFFICULT TO TRADE OUR COMMON STOCK ON THE OVER-THE-
COUNTER ELECTRONIC BULLETIN BOARD

Our common stock trades only on the Over-the-Counter Electronic Bulletin
Board. We currently do not meet the requirements for listing on the Nasdaq
National Market or any national stock exchange. However, we believe that our
common stock will qualify for listing on the Nasdaq National Market after we
effect a one-for-fifteen reverse stock split. Because our common stock trades on
the Bulletin Board, an investor may find it very difficult to sell or to obtain
accurate quotations as to the market value of our common stock. Furthermore,
because our common stock is not listed on the Nasdaq National Market, trading in
our common stock is also subject to certain rules promulgated by the SEC under
the Securities Exchange Act of 1934. These rules require additional disclosure
by broker-dealers in connection with any trades involving a stock defined as a
penny stock. Generally, a penny stock is any non-Nasdaq National Market listed
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Our common stock meets the definition of a penny stock. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from affecting transactions in our common stock and
may limit the ability of purchasers of our common stock to resell our common
stock in the secondary market.

WE EXPECT THE AVERAGE SELLING PRICE OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE
GROSS MARGINS AND REVENUES

Product prices in the audio technology industry generally decrease over the
life of a particular product. The willingness of prospective customers to design
our products into their products depends to a significant extent upon our
ability to price our products at levels that are cost-effective for these
customers. As the markets for our products mature and competition increases, we
anticipate that prices for our products will decline over time. If we are unable
to reduce our costs sufficiently to offset declines in our product prices, or if
we are unable to introduce new, higher performance products with higher product
prices, our gross margins and revenues will decline.

WE DEPEND ON A CREDIT FACILITY FROM TRANSAMERICA AND GOLDMAN SACHS TO FUND OUR
BUSINESS OPERATIONS

Because we have not been profitable to date, we have had to fund our losses
through a combination of equity and debt financings. In June 1998, we entered
into a credit facility with the Technology Finance Division of Transamerica
Business Credit Corporation and Goldman Sachs Credit Partners LP. This credit
facility provides for an aggregate maximum borrowing of $40 million. The
interest rate on the credit facility is generally the prime rate plus 3% to 5%.
Accordingly, while the credit facility provides us with needed working capital,
the high cost of servicing any borrowing under it could negatively affect our
liquidity. In addition, the credit facility may not be sufficient to meet our
working capital requirements. In the event we must secure capital in addition to
the line of credit and the proceeds we receive from this rights offering, there
can be no assurance that such capital will be available on acceptable terms or
at all. Our inability to secure such potential future financing, if necessary,
would materially adversely affect our business, financial condition and results
of operations.

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TO COMPETE EFFECTIVELY IN THE AUDIO TECHNOLOGY MARKET, WE NEED TO DEVELOP NEW
AUDIO TECHNOLOGIES THAT ARE WIDELY ACCEPTED BY OUR CUSTOMERS

Our success depends on our ability to develop and market new audio
technologies aimed at advancing the level of audio quality in personal computers
and consumer electronics devices. To be successful, we must timely develop new
products that we can sell at competitive prices to our customers who will design
them into their products. In order for our customers to design our advanced
audio products into their personal computers and consumer electronic products,
we must:

- anticipate market trends;

- anticipate the performance and functionality requirements of our current
and potential customers;

- develop and produce products that meet the timing and pricing
requirements of our current and potential customers; and

- produce products that can be available in a timely manner consistent with
our current and potential customers' development and production
schedules.

We are beginning to expand our business model to provide for an increased
number of audio-related products, including audio cards and audio communications
combination cards. We may require additional working capital funds for this
expansion to provide for incremental inventory and broader marketing programs. A
number of factors may limit the success of our expansion, and each could
negatively impact our business and results of operations. These factors include:

- the failure of the market for advanced audio products to grow;

- reduced demand for our products as a result of increased competition in
this market;

- unforeseen technological change; and

- our potential failure to introduce new versions of products that our
customers and the market accept.

A failure to develop new audio technologies that will be accepted by our
customers could materially adversely affect our ability to generate revenues.

NEW GENERATIONS OF MICROPROCESSORS AND OTHER NEW TECHNOLOGIES MAY DECREASE
DEMAND FOR OUR PRODUCTS

We also face the risk that new generations of microprocessors that are
capable of performing the function of advanced audio products will greatly
reduce demand for our products. Each successive generation of microprocessors
has provided increased performance, which could, in the future, result in a
microprocessor capable of performing advanced audio functions to an extent that
diminishes or eliminates the need or preference for our products. In addition,
each new generation of technology, including digital audio technology, generally
requires increased processing power. The increased capabilities of
microprocessors in the future may lower demand for our products which will
materially adversely affect our business, financial condition and results of
operations.

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INTENSE COMPETITION IN THE MARKET FOR AUDIO PRODUCTS AND ADVANCED AUDIO
TECHNOLOGIES COULD PREVENT AUREAL FROM INCREASING REVENUE AND PREVENT AUREAL
FROM ACHIEVING PROFITABILITY

The markets for audio products and advanced audio technologies are
intensely competitive and are characterized by evolving industry standards that
result in:

- short product life cycles;

- significant pressure to improve price and performance; and

- frequent new product introductions.

We expect competition to increase from existing competitors and from other
companies that may enter the markets for advanced audio products with devices
that may be less costly or provide higher performance or additional features
than the products we currently offer. However, we are unable to predict the
timing and nature of any such competitive product offerings.

In addition, we anticipate that we will compete for the development of new
technologies and for the sale of semiconductor products with a number of
companies who have more extensive resources, including financial, manufacturing,
technical, marketing and distribution. Furthermore, some of these competitors
have greater intellectual property rights, broader product lines and
longer-standing relationships with their customers than we do. In addition to
our established competitors, we may also face competition from a number of
emerging companies. To remain competitive, we believe we must, among other
things, invest significant resources in developing new products and enhancing
our current products and maintaining customer satisfaction. If we fail to do so,
our products will not compete favorably with those of our competitors and our
revenue could be materially adversely affected.

WE MAY NOT HAVE AN ADEQUATE SUPPLY OF OUR PRODUCTS BECAUSE WE DEPEND ON
FOUNDRIES TO PRODUCE OUR PRODUCTS AND OUR PRODUCTS ARE DIFFICULT TO MANUFACTURE

We do not manufacture our own products, and we depend on outside
manufacturing resources for production of all of our products. Currently, we
utilize one foreign semiconductor foundry and one contract manufacturer for
production of our board-level products. These facilities have indicated to us
that they have the manufacturing availability to provide for our planned levels
of production of each of our products for the next 12 months; however, our
production relationship with them is based only upon purchase orders.
Consequently, they may not continue to adequately provide manufacturing capacity
to us for our current level of production or any potential increases in our
production levels. In the event that they cease to manufacture our products, we
would have to contract with alternative facilities. However, we may not be able
to timely contract with alternative facilities or to contract with them at all.
Such a situation could materially adversely affect our ability to sell products
to our customers, which in turn would hurt our financial condition and results
of operations.

The manufacture of semiconductor products is a highly complex and precise
process. Minute levels of contaminants in the manufacturing environment, defects
in the masks used to print circuits on wafers, difficulties in the fabrication
process and other factors can cause a substantial percentage of wafers to be
rejected or a significant number of die on each wafer not to function. Many of
these problems are difficult to diagnose and

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potentially time-consuming or expensive to remedy. The foundries that we employ
may, in the future, experience irregularities or adverse yield fluctuations in
the manufacturing processes of our products. In such event, our business,
financial condition and results of operations may be materially adversely
affected.

OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER OF AUREAL

Provisions in our amended and restated certificate of incorporation and
bylaws may have the effect of delaying or preventing a change of control or
changes in our management. These provisions include, among others:

- the division of the board of directors into three separate classes;

- the right of the board to elect the director to fill a space created by
the expansion of the board;

- the ability of the board to alter our bylaws; and

- the requirement that at least 10% of the outstanding shares are needed to
call a special meeting of stockholders.

Furthermore, because we are incorporated in Delaware, we are subject to the
provisions of section 203 of the Delaware General Corporation Law. These
provisions prohibit certain large stockholders, in particular those owning 15%
or more of the outstanding voting stock, from consummating a merger or
combination with a corporation unless (1) 66 2/3% of the shares of voting stock
not owned by this large stockholder approve the merger or combination or (2) the
board of directors approves the merger or combination or the transaction which
resulted in the large stockholder owning 15% or more of our outstanding voting
stock.

WE MAY NOT BE ABLE TO RETAIN OUR KEY ENGINEERING, MARKETING, SALES AND
MANAGEMENT PERSONNEL THAT WE NEED TO SUCCESSFULLY MANAGE OUR BUSINESS

Our success depends to a significant extent upon the continued services of
key engineering, marketing, sales and management personnel. Our employees may
voluntarily terminate their employment with us at any time. We recognize the
value of the contributions of each of our employees, and we have developed
compensation programs, including stock programs open to all employees, designed
to retain our employees. However, competition for these employees is intense,
particularly in Silicon Valley, and the loss of the services of any one of these
employees could materially adversely affect our business, financial condition
and results of operations.

OUR PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY AND THIS TECHNOLOGY MAY INFRINGE ON
THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES

Our ability to compete successfully will depend, in part, on our ability to
protect our proprietary technology. We rely on a combination of patents, trade
secrets, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical measures to protect our proprietary rights.
Nevertheless, such measures may not be adequate or safeguard the proprietary
technology underlying our advanced audio products. In addition, employees,
consultants and others who participate in the development of our products may
breach their agreements with us regarding our intellectual property, and we

10
<PAGE> 14

may not have adequate remedies for any such breach. We also realize that our
proprietary information and trade secrets may become known through other means
not currently foreseen by us. Moreover, notwithstanding our efforts to protect
our intellectual property, our competitors may be able to develop products that
are equal or superior to our products without infringing on any of our
intellectual property rights. In addition, we may not be able to effectively
protect our intellectual property rights in certain countries. Our failure to
protect our proprietary technology may materially adversely affect our financial
condition and results of operations.

Although we do not believe that our products infringe the proprietary
rights of any third parties, third parties may still assert infringement or
invalidity claims, or claims for indemnification resulting from infringement
claims, against us. The assertion of these claims could materially adversely
affect our business, financial condition and results of operations. In addition,
irrespective of the validity or the successful assertion of any claims, we could
incur significant costs in defending against these claims. In defending claims
of alleged infringement, we could incur significant expenses and waste resources
that could have a material adverse affect on our business, financial condition
and results of operations.

WE ARE INVOLVED IN LAWSUITS WITH CREATIVE AND E-MU WHICH COULD NEGATIVELY IMPACT
OUR BUSINESS

In February 1998, Creative Technology Ltd. and its subsidiary, E-MU
Systems, Inc., served us with a lawsuit for patent infringement that Creative
and E-MU filed in the U.S. District Court, Northern District of California. The
lawsuit asserts that our original Vortex product infringes on a patent that
describes a specific implementation for an electronic musical instrument
designed by E-MU. Creative and E-MU seek, among other things, a preliminary and
permanent injunction against alleged continuing acts of infringement by us and
an accounting of damages plus interest. In response, we filed a motion for
summary judgment. In August 1998, E-MU and Creative filed a motion for a
preliminary injunction with respect to our original and updated Vortex product.
In October 1998, the court denied Creative's motion for preliminary injunction.
In addition, our motion for summary judgment was also denied. We believe that
the actions that Creative and E-MU filed are without merit, and we are
vigorously defending against these actions. In December 1998, we filed a lawsuit
alleging patent infringement against Creative and E-MU. Aureal believes that
Creative and E-MU have infringed on two of their patents, Patent No. 5,596,644
entitled "Method and Apparatus for Efficient Presentation of Hi-Quality
3-Dimensional Audio" and Patent No. 5,802,180 entitled "Method and Apparatus for
Efficient Presentation of 3-Dimensional Audio Including Ambient Effects."

Additional litigation may be necessary to resolve the claims asserted by
Creative and E-MU and to resolve our claims against Creative and E-MU and any
other claims asserted in the future to defend against claims of infringement or
invalidity or to enforce and protect our intellectual property rights. We cannot
assure you that we will prevail in any litigation with either of them. Also, any
litigation, whether or not determined in our favor or settled by us, would be
costly and would divert the efforts and attention of our management and
technical personnel from normal business operations; this could materially
adversely affect our business, financial condition and results of operations.
Adverse determinations in litigation could result in the loss of our proprietary
rights, subject us to significant liabilities, require us to seek licenses from
third parties or prevent us from licensing our technology. Any of these results
could have a material adverse affect on our business, financial condition and
results of operations.

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<PAGE> 15

THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS

We use a number of computer software programs and operating systems in our
internal operations, including applications used in financial business systems
and various administration functions. To the extent that these software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year "2000," some level of modification or even possible
replacement of such source code or applications could be necessary. Given the
current information, we currently do not anticipate that such year 2000 costs
will have a material impact upon us. We have requested and obtained information
regarding year 2000 compliance from suppliers and providers of all of our
mission critical software systems. Based on the information we currently have,
all mission critical systems appear to be year 2000 compliant. We are currently
contacting major vendors and customers to obtain year 2000 compliance
certificates. The failure of any of our key suppliers or customers to be year
2000 compliant could have a material adverse effect on our business, financial
condition and results of operations.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
public reference facilities of the SEC in Washington, D.C., Chicago, Illinois
and New York, New York. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from the SEC's web site at http:\\www.sec.gov.

The SEC allows us to "incorporate by reference" the information we have
filed with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be part of this prospectus. We incorporate by reference the
documents listed below. This prospectus is part of a registration statement we
filed with the SEC (Registration Statement No. 333- ). The
documents we incorporate by reference are:

(1) Aureal's Registration Statement on Form S-2/A-2 (Registration No.
333-66867) filed on December 21, 1998.

(2) Aureal's Definitive Proxy for the Annual Meeting of Stockholders
filed on April , 1999.

(3) Aureal's Annual Report on Form 10-K for the fiscal year ended
January 3, 1999 filed on April , 1999.

You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:

Stockholder Services
Aureal Semiconductor Inc.
4245 Technology Drive
Fremont, California 94538
(510) 252-4245

12
<PAGE> 16

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this prospectus, including the above risk
factors section, contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In many cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue," or the negative
of such terms and other comparable terminology. These statements are only
predictions. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks faced by us described below and elsewhere in this prospectus.

We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
above, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this prospectus
could have a material adverse effect on our business, operating results and
financial condition.

USE OF PROCEEDS

We intend to use the proceeds from the rights offering to reduce our
outstanding debt and for working capital and general purposes.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 22, 1999 by:

- each person who is known to us to own beneficially 5% or more of the
outstanding shares of common stock;

- each director and director-nominee of Aureal;

- the Chief Executive Officer and the other executive officers of Aureal as
of January 3, 1999, whose salary and bonus for the year ended January 3,
1999 exceeded $100,000; and

- all of our directors and executive officers as a group.

The percentages set forth in the percent column under the beneficial
ownership after the rights offering heading have been calculated based on the
assumption that each of the principal stockholders would subscribe for its
pro-rata portion, determined as of March 22, 1999, of this rights offering, and
assuming the conversion of all outstanding series B preferred stock. In the
event each stockholder subscribes for its pro-rata portion of the rights
offering, its beneficial ownership percentage of Aureal after the rights
offering will not be identical to its beneficial ownership percentage of Aureal
prior to the rights offering because SEC regulations require that we include
stock options exercisable within 60 days

13
<PAGE> 17

of March 22, 1999, for purposes of the calculations in this table. However, for
determining each stockholder's pro-rata portion of the rights offering, we only
include the Aureal common stock owned by each stockholder and did not include
exercisable or unexercisable options.

To the extent any stockholder elects not to subscribe for its pro-rata
portion of the rights offering, its beneficial ownership of Aureal after the
rights offering will be less than is indicated in this table. Likewise, if any
stockholder elects to subscribe for more that its pro-rata portion of the rights
offering, its beneficial ownership of Aureal after the rights offering will be
greater than is indicated in this table. As note above, Oaktree has committed to
purchase any portion of the rights offering that other stockholders elect not to
subscribe for, up to the entire $20 million.

Except as otherwise indicated, the address of each beneficial owner is c/o
Aureal Semiconductor Inc., 4245 Technology Drive, Fremont, California 94538. The
table is based upon information supplied to Aureal by the officers, directors
and principal stockholders. Except as otherwise indicated, we believe that the
persons or entities named in the table have sole voting and investment power
with respect to all shares of common stock and preferred stock shown as
beneficially owned by them, subject to community property laws where applicable.

The share amounts set forth in this table have not been adjusted to reflect
the one-for-fifteen reverse stock split which Aureal's board of directors
approved on March 18, 1999 and which is to be voted upon by our stockholders at
the 1999 annual meeting.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE RIGHTS AFTER THE RIGHTS
OFFERING OFFERING
-------------------- --------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES PERCENT SHARES PERCENT
------------------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Oaktree Capital Management, LLC(1)....... 42,626,980 61.4% 79,062,912 76.9%
333 South Grand Street, 28th Floor
Los Angeles, CA 90071
D. Richard Masson(2)..................... 42,626,980 61.4% 79,062,912 76.9%
The TCW Group, Inc. and its
affiliates(3).......................... 19,608,363 28.7% 42,472,369 41.8%
11100 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025
Thomas K. Smith(4)....................... 19,608,363 28.7% 42,472,369 41.8%
Appaloosa Management L.P................. 5,560,074 8.5% 8,391,643 8.5%
26 Main Street
Chatham, New Jersey 07928
Kenneth A. Kokinakis(5).................. 1,625,000 2.4% 1,637,732 1.6%
Richard E. Christopher(6)................ 40,625 * 50,810 *
L. William Krause(7)..................... 151,875 * 151,875 *
David J. Domeier(8)...................... 497,500 * 510,232 *
Scott H. Foster(9)....................... 1,948,372 2.9% 2,149,751 2.1%
Michael L. Hunter(10).................... 500,000 * 500,000 *
Sanjay Iyer(11).......................... 602,500 * 602,500 *
Brendan R. O'Flaherty(12)................ 510,000 * 513,820 *
All directors and executive officers as a
group (10 persons)(13)................. 48,502,852 64.8% 85,179,631 78.7%
</TABLE>

14
<PAGE> 18

- -------------------------
* Less than 1%.

(1) Oaktree acts as an investment manager for certain entities, and in that
capacity, may be deemed to beneficially own securities held by those
entities. In addition, Oaktree provides sub-advisory services to certain
entities affiliated with The Trust Company of the West ("TCW"), and in that
capacity, may be deemed to beneficially own securities held by those TCW
entities. As a result, Oaktree may be deemed to own 38,601,980 shares of
common stock. In addition, pursuant to warrants issued in August 1997,
Oaktree holds rights to acquire 4,025,000 shares of common stock. Oaktree
also beneficially owns 41,785 shares of series B preferred stock and 100
shares of series C preferred stock. Series B preferred stock have voting
rights on an "as converted" basis. As of March 22, 1999, the 41,785 shares
of series B preferred stock were convertible, at the option of the holder,
into 16,777,168 shares of common stock and the 100 shares of series C
preferred stock were convertible, at the option of the holder, into
2,553,202 shares of common stock. The series C preferred stock have no
voting rights.

(2) To the extent that Mr. Masson, as an authorized representative of Oaktree,
participates in the process to vote or dispose of any Oaktree controlled
shares, he may be deemed to be the beneficial owner of those shares. Mr.
Masson disclaims beneficial ownership of those shares.

(3) The TCW Group, Inc. may be deemed to beneficially own 16,658,363 shares of
common stock as well as warrants to purchase 2,950,000 additional shares of
common stock. Also under the same beneficial ownership are 35,816 shares of
series B preferred stock which as of March 22, 1999 were convertible into
14,380,430 shares of common stock. All of these securities are held by
limited partnerships, trusts and third party separate accounts for which
The TCW Group, Inc. acts as general partner, trustee and investment advisor
respectively. The TCW Group, Inc. expressly disclaims beneficial ownership
of these securities.

(4) To the extent Mr. Smith, as either a Senior Vice President or authorized
representative of TCW or TCW Asset Management Company, participates in the
process to vote or dispose of the shares described in note (3) above, Mr.
Smith may be deemed to be the beneficial owner of those shares. Mr. Smith
disclaims beneficial ownership of those shares.

(5) Includes 1,600,000 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999. Of those shares, 654,167 are
not vested and subject to repurchase by Aureal.

(6) Includes 20,625 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999.

(7) Includes 151,875 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999.

(8) Includes 472,500 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999. Of those shares, 178,303 are
not vested and subject to repurchase by Aureal.

15
<PAGE> 19

(9) Includes 1,522,944 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999. Of those shares, 193,542 are
not vested and subject to repurchase by Aureal.

(10) Includes 500,000 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999. Of those shares, 197,559 are
not vested and subject to repurchase by Aureal.

(11) Includes 602,500 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999. Of those shares, 233,988 are
not vested and subject to repurchase by Aureal.

(12) Includes 502,500 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999. Of those shares, 200,060 are
not vested and subject to repurchase by Aureal.

(13) Includes 9,427,944 shares subject to exercise of outstanding stock options
and warrants exercisable within 60 days of March 22, 1999. Of those shares,
1,657,619 are not vested and subject to repurchase by Aureal. Includes
38,601,980 shares that may be deemed beneficially owned by Mr. Masson, and
16,658,363 shares which may be deemed beneficially owned by Mr. Smith. In
addition, 41,785 shares of series B preferred stock, convertible into
16,777,168 shares of common stock with "as converted" voting rights, and
100 shares of series C preferred stock, convertible into 2,553,202 shares
of common stock, are held by the parties indicated.

THE RIGHTS OFFERING

THE SUBSCRIPTION RIGHTS

We are offering our stockholders the right to subscribe for and purchase up
to 33,333,333 shares of common stock at $0.60 per share. The rights offering is
open only to those stockholders who owned common stock on , 1999.
The rights offering is not open to anyone who did not own common stock on
, 1999.

We are offering stockholders the opportunity to purchase one share of
common stock for every shares of common stock they owned on
, 1999. In determining the number of shares of common stock we will
issue to each stockholder pursuant to the subscription rights offered by this
prospectus, we will round up to the nearest whole number. We will not issue
fractional subscription rights and we will not pay cash in place of subscription
rights.

BASIC SUBSCRIPTION PRIVILEGE

Each subscription right entitles you to purchase one share of common stock
for every shares of common stock you owned at the close of business on
, 1999. You will receive certificates representing the shares that
you purchase pursuant to your basic subscription privilege as soon as
practicable after the expiration date, whether you exercise your subscription
rights immediately prior to the expiration date or earlier.

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<PAGE> 20

OVER-SUBSCRIPTION PRIVILEGE

Each subscription right also grants you an over-subscription privilege to
purchase additional shares of common stock that are not purchased by other
stockholders. You are entitled to exercise your over-subscription privilege only
if you exercise your basic subscription privilege in full. If you wish to
exercise your over-subscription privilege, you should indicate the number of
additional shares that you would like to purchase in the space provided on your
subscription agreement. When you send in your subscription agreement, you must
also send the full purchase price for the number of additional shares that you
have requested to purchase in addition to the payment due for shares purchased
through your basic subscription privilege. If the number of shares remaining
after the exercise of all basic subscription privileges is not sufficient to
satisfy all over-subscription privileges, you will be allocated shares pro rata
subject to elimination of fractional shares, in proportion to the number of
shares you purchased through your basic subscription privilege. However, if your
pro rata allocation exceeds the number of shares you requested on your
subscription certificate, then you will receive only the number of shares that
you requested, and the remaining shares from your pro rata allocation will be
divided among other stockholders exercising their over-subscription privileges.
In addition, we have the discretion to issue less than the total number of
shares that may be available for over-subscription requests.

As soon as practicable after , 1999, ChaseMellon Shareholder
Services, the subscription agent, will determine the number of shares of common
stock that you may purchase pursuant to the over-subscription privilege. You
will receive certificates representing these shares as soon as practicable after
the expiration date. If you request and pay for more shares than are allocated
to you, we will refund that overpayment, without interest to you. In connection
with the exercise of the over-subscription privilege, banks, brokers and other
nominee holders of subscription rights who act on behalf of beneficial owners
will be required to certify to the subscription agent and us as to the aggregate
number of subscription rights that have been exercised, and the number of shares
of common stock that are being requested through the over-subscription
privilege, by each beneficial owner on whose behalf such nominee holder is
acting.

PLAN OF DISTRIBUTION

On or about , 1999, we will distribute the subscription rights
and copies of this prospectus to individuals who owned shares of our common
stock on . If you wish to exercise your subscription rights and
purchase shares of common stock, you should complete the subscription agreement
and return it, with payment for the shares, to the subscription agent,
ChaseMellon Shareholder Services. If you have any questions, you should contact
our information agent, ChaseMellon Shareholder Services, at the telephone number
and address on page 20. See "The Rights Offering -- Subscription procedures."

We have retained our transfer agent, ChaseMellon Shareholder Services, to
assist with the rights offering in the role of the subscription agent. The
subscription agent will hold all subscription agreements received from
stockholders, and will be responsible for delivering stock certificates and
refunds, in case of over-subscription or cancellation of the offering, to
stockholders. We will pay all fees and expenses of the subscription agent in
connection with the rights offering, which we estimate will be approximately
$35,000. You are responsible for paying any other commissions, fees, taxes or
other expenses incurred in connection with the exercise of the subscription
rights.

17
<PAGE> 21

EXPIRATION DATE

The rights offering will expire at 5:00 p.m., Eastern Daylight Savings
Time, on , 1999. IF YOU DO NOT EXERCISE YOUR BASIC SUBSCRIPTION
PRIVILEGE OR OVER-SUBSCRIPTION PRIVILEGE PRIOR TO SUCH TIME, YOUR SUBSCRIPTION
RIGHTS WILL BE NULL AND VOID.

We will reject any subscription agreements that the subscription agent
receives after 5:00 p.m. on the expiration date, regardless of when the
documents were originally mailed. Stockholders who wish to participate in the
rights offering should submit all subscription agreements to ChaseMellon by the
expiration date, or to their broker or bank at least 10 days before the
expiration date, to allow the broker or bank sufficient time to carry out those
instructions.

The rights offering is not conditioned upon our receipt of subscriptions
for any minimum number of shares. However, the rights offering may be canceled
at any time prior to its completion, in which case all subscription payments
will be returned without interest.

SUBSCRIPTION PAYMENTS

Each subscription agreement submitted pursuant to this rights offering must
be accompanied by the full amount of the purchase price for all of the shares of
common stock subscribed for by the stockholder. If a stockholder submits less
than the full purchase price, we will limit such stockholder's maximum
subscription to the number of shares purchasable with those funds, rounded down
to the nearest whole number of shares.

If a subscription is rejected in whole or in part, the subscription agent
will promptly refund payment for any unpurchased shares. We will not pay
interest on any subscription funds.

DETERMINATION OF OFFERING PRICE

SUBSCRIPTION PROCEDURES

To participate in the rights offering, you must submit a properly completed
subscription agreement, together with full payment of the offering price for all
shares for which you subscribe. Those who hold common stock for the account of
others, such as brokers, banks, trustees or depositories, should notify the
beneficial owners of those shares as soon as possible to ascertain the
beneficial owners' intentions and to obtain instructions with respect to the
rights offering.

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<PAGE> 22

The subscription agreement and payment must be received by the subscription
agent before 5:00 p.m., Eastern Daylight Savings Time, on , 1999.
Payment of the offering price must be made:

- by check or bank draft drawn upon a U.S. bank or postal, telegraphic, or
express money order payable to "ChaseMellon Shareholder Services, as
Subscription Agent;"

- by wire transfer of same day funds to the account maintained by the
subscription agent for such purpose; or

- by notice of guaranteed delivery of payment from a bank, a trust company
or a New York Stock Exchange member.

Payment of the offering price will be deemed made only upon (1) the
subscription agent's receipt of a certified check or bank draft drawn upon a
U.S. bank or any postal, telegraphic or express money order, (2) the clearance
of any uncertified check or (3) the receipt of good funds in the wire transfer
account maintained by the subscription agent. If you wish to pay by uncertified
personal check, please note that your check may take five business days or more
to clear and, therefore, you should make payment sufficiently in advance of the
expiration date to ensure that payment is received and clears by the expiration
date.

Subscription agreements and any checks in payment of the offering price
should be delivered by mail, hand delivery, or overnight courier, to:

ChaseMellon Shareholder Services, L.L.C.

By mail:
P.O. Box 3301
South Hackensack, N.J. 07606
Attn: Reorganization Department

By overnight delivery:
85 Challenger Road
Mail Drop-Reorg
Ridgefield Park, N.J. 07660
Attn: Reorganization Department

By hand:
120 Broadway, 13th Floor
New York, N.Y. 10271
Attn: Reorganization Department

By Facsimile Transmissions: (for eligible institutions only).
(201) 296-4293
Confirm by telephone (201) 296-4860

If you do not indicate the number of shares to be purchased or do not
forward full payment of the offering price, then you will be deemed to have
exercised the basic subscription privilege to the full extent of the payment
received and, if any funds remain, will be deemed to have exercised the
over-subscription privilege to the extent of the remaining funds. In each case,
share amounts will be rounded down to the nearest whole number.

19
<PAGE> 23

The method of delivery of the subscription agreement and payment of the
offering price will be at your election and risk. If sent by mail, it is
recommended that your subscription agreement and payment be sent by registered
mail, properly insured, with return receipt requested, and that a sufficient
number of days be allowed to ensure delivery to the subscription agent and
clearance of payment prior to the expiration date. Because uncertified personal
checks may take at least five business days to clear, you are urged to arrange
for payment by certified or cashier's check, money order or wire transfer of
funds.

Our answers to all questions concerning the timeliness, validity, form and
eligibility of any subscription will be final and binding. We may, in our sole
discretion, waive any defect or irregularity, permit a defect or irregularity to
be corrected within any time as we may determine, or reject the purported
exercise of any right. Subscriptions will not be deemed to have been received or
accepted until all irregularities have been waived or cured within the time that
we determine in our discretion. Neither we nor the subscription agent will be
under any duty to notify you of any defect or irregularity in connection with
the submission of your subscription agreement or incur any liability for failure
to give notification.

If you have any questions concerning the rights offering or these
subscription procedures, or if you would like additional copies of this
prospectus or other documents, please contact our information agent: ChaseMellon
Shareholder Services, 450 West 33rd Street, 14th Floor, New York, N.Y. 10001.
Banks and Brokers call collect: (212) 273-8083. All others call toll free (800)
684-8823.

NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS

Only you may exercise the basic subscription privilege and the
over-subscription privilege. You may not sell, give away or otherwise transfer
the basic subscription privilege or the over-subscription privilege.

NO REVOCATION

After you have exercised your basic subscription privilege or
over-subscription privilege, you may not revoke that exercise. You should not
exercise your subscription rights unless you are certain that you wish to
purchase additional shares of our common stock.

AMENDMENT AND TERMINATION OF RIGHTS OFFERING

We reserve the right to amend the terms and conditions of the rights
offering. If we make an amendment that we consider significant, we will (1) mail
notice of the amendment to all stockholders who owned shares of common stock on
, 1999, (2) extend the expiration date by at least 14 days and (3)
offer all subscribers not less than 10 days to revoke any prior subscriptions,
in whole or in part. In all other cases, subscriptions will be irrevocable.

We also reserve the right to terminate the rights offering at any time, in
our discretion, in which case all subscriptions will be canceled, and we will
return all subscription payments to subscribers without interest.

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<PAGE> 24

Upon the occurrence of any change in or cancellation of the rights
offering, we will issue a press release to that effect, and we will file a
post-effective amendment to the registration statement covering this prospectus.

PURCHASE OF SHARES BY OUR PRINCIPAL STOCKHOLDER

As of March 22, 1999, Oaktree Capital Management LLC owned approximately
59% of the outstanding shares of our common stock and, therefore, will receive
rights to subscribe for approximately 19.7 million shares of our common stock in
the rights offering. In exchange for Aureal adjusting the conversion price of
the shares of series B preferred stock owned by Oaktree from $2.50 to $0.90,
Oaktree has agreed to exercise its basic subscription privilege and
over-subscription privilege up to a total value of $20,000,000. In addition,
Oaktree has agreed to convert all of its series B preferred stock into common
stock immediately following the completion of the subscription offering.

SHARES OF COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING

Assuming we issue all of the shares of common stock offered in the rights
offering and adjust the conversion price of the series B preferred stock from
$2.50 per share to $0.90 per share, approximately 150,000,000 shares of common
stock will be issued and outstanding following the rights offering and
conversion of the Series B preferred stock. This would represent a 73% increase
in the number of outstanding shares of our common stock. If you do not exercise
your basic subscription privilege, the percentage of Aureal common stock that
you hold will decrease.

CERTAIN OWNERSHIP LIMITS AND REPORTING REQUIREMENTS

Any person or group that acquires direct or indirect beneficial ownership
of more than 5% of the outstanding shares of our common stock will be subject to
special reporting requirements under Section 13(d) or 13(g) of the Securities
Exchange Act of 1934. Any person or group that acquires direct or indirect
beneficial ownership of more than 10% of the outstanding shares of our common
stock will be subject to special reporting requirements under Section 16(a) of
the Exchange Act and may become liable under Section 16(b) of the Exchange Act
for reimbursement of any "short-swing profits." Please consult with your
attorney to see if these rules will apply to you.

STATE AND FOREIGN SECURITIES LAWS

The rights offering is not being made in any state or foreign country in
which it is unlawful to do so, nor are we selling or accepting subscriptions
from holders who are residents of any such state or country. We may delay the
commencement of the rights offering in certain states or other jurisdictions in
order to comply with the securities law requirements of those states or other
jurisdictions. It is not anticipated that there will be any changes in the terms
of the rights offering. We may decline, in our sole discretion, to make
modifications to the terms of the rights offering requested by certain states or
other jurisdictions, in which case stockholders who live in those states or
jurisdictions will not be eligible to participate in the rights offering.

21
<PAGE> 25

NO RECOMMENDATIONS

We are not making any recommendation as to whether or not you should
exercise your subscription rights. You should make your decision based on your
own assessment of your best interests.

FEDERAL INCOME TAX CONSIDERATIONS

The following summarizes the material federal income tax consequences of
the rights offering. This summary is based on current law, which is subject to
change at any time, possibly with retroactive effect. This summary is not a
complete discussion of all federal income tax consequences of the rights
offering, and, in particular, may not address federal income tax consequences
applicable to stockholders subject to special treatment under federal income tax
law. In addition, this summary does not address the tax consequences of the
rights offering under applicable state, local or foreign tax laws. This
discussion assumes that your shares of Aureal stock and the subscription rights
and shares issued to you pursuant to the rights offering constitute capital
assets.

Receipt and exercise of the subscription rights distributed pursuant to the
rights offering is intended to be nontaxable to stockholders, and the following
summary assumes you will qualify for such nontaxable treatment. We have not
sought, nor do we intend to seek, any ruling from the IRS or an opinion of
counsel related to the tax matters described below.

This discussion is included for your general information only. You should
consult your tax advisor to determine the tax consequences to you of the rights
offering in light of your particular circumstances, including any state, local
and foreign tax consequences.

TAXATION OF STOCKHOLDERS

Receipt of a subscription right: You will not recognize any gain or other
income upon receipt of a subscription right.

Tax basis of subscription rights: Your tax basis in each subscription right
will depend on whether you exercise the subscription right or allow the
subscription right to expire.

If you exercise a subscription right, your tax basis in the subscription
right will be determined by allocating the tax basis of your Aureal stock on
which the subscription right is distributed between the Aureal stock and the
subscription right, in proportion to their relative fair market values on the
date of distribution of the subscription right. However, if the fair market
value of your subscription rights is less than 15% of the fair market value of
your existing shares of Aureal stock, then the tax basis of each subscription
right will be deemed to be zero, unless you elect, by attaching an election
statement to your federal income tax return for 1999, to allocate tax basis to
your subscription rights.

If you allow a subscription right to expire, it will be treated as having
no tax basis.

Holding period of subscription rights: Your holding period for a
subscription right will include your holding period for the shares of common
stock upon which the subscription right is issued.

Expiration of subscription rights: You will not recognize any loss upon the
expiration of a subscription right.

22
<PAGE> 26

Exercise of subscription rights: You generally will not recognize a gain or
loss on the exercise of a subscription right. The tax basis of any share of
common stock that you purchase through the rights offering will be equal to the
sum of your tax basis, if any, in the subscription right exercised and the price
paid for the share. The holding period of the shares of common stock purchased
through the rights offering will begin on the date that you exercise your
subscription rights.

If treated as a taxable distribution: If, contrary to Aureal's intent, the
rights offering does not qualify as nontaxable, you would be treated as
receiving a taxable distribution equal to the fair market value of the
subscription rights on their distribution date. The distribution would be taxed
as a dividend to the extent made out of our current or accumulated earnings and
profits; and any excess would be treated first as a return of your basis
(investment) in your Aureal stock and then as a capital gain. You would have a
tax basis in the rights equal to the fair market value of the rights on the date
of the rights distribution and your holding period in the rights would begin on
the date of distribution of the rights. Expiration of the subscription rights
would result in a capital loss. You generally will not recognize gain or loss on
the exercise of a subscription right. The tax basis of any share of common stock
that you purchase through the rights offering will be equal to the sum of your
tax basis, if any, in the subscription right exercised and the price paid for
the share. The holding period of the shares of common stock purchased through
the rights offering will begin on the date that you exercise your subscription
rights.

TAXATION OF AUREAL

We will not recognize any gain, other income or loss upon the issuance of
the subscription rights, the lapse of the subscription rights, or the receipt of
payment for shares of common stock upon exercise of the subscription rights.

23
<PAGE> 27

LEGAL MATTERS

Gray Cary Ware & Freidenrich LLP will deliver an opinion to us about the
validity of the issuance of the shares of our common stock.

EXPERTS

The audited consolidated financial statements incorporated by reference in
this Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in accounting and auditing in giving said reports.

24
<PAGE> 28

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

NO ONE (INCLUDING ANY SALESMAN OR BROKER) IS AUTHORIZED TO PROVIDE ORAL OR
WRITTEN INFORMATION ABOUT THIS OFFERING THAT IS NOT INCLUDED IN THIS PROSPECTUS.

AUREAL SEMICONDUCTOR INC.

33,333,333 RIGHTS TO PURCHASE SHARES OF

COMMON STOCK

33,333,333 SHARES OF

COMMON STOCK

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

PROSPECTUS
----------------

APRIL , 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 29

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses in connection with
the sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates
except the Securities and Exchange Commission registration fees.

<TABLE>
<CAPTION>
TO BE PAID
BY THE
REGISTRANT
----------
<S> <C>
SEC registration.................................... $ 5,560
Accounting fees and expenses........................ 7,000
Legal fees and expenses............................. 15,000
Miscellaneous expenses.............................. 50,000
-------
Total............................................. $77,560
=======
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Registrant's Certificate of Incorporation provides that each person
who is or was or who had agreed to become a director or officer of the
Registrant or who had agreed at the request of the Registrant's Board of
Directors or an officer of the Registrant to serve as an employee or agent of
the Registrant or as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by the Registrant to the full extent permitted by the DGCL or any
other applicable laws. Such Certificate of Incorporation also provides that no
amendment or repeal of such Certificate of Incorporation shall apply to or have
any effect on the right to indemnification permitted or authorized thereunder
for or with respect to claims asserted before or after such amendment or repeal
arising from acts or omissions occurring in whole or in part before the
effective date of such amendment or repeal.

The Registrant's Bylaws provide that the Registrant shall indemnify to the
full extent authorized by law any person made or threatened to be made a party
to an action or a proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate was or
is a director, officer or employee of the Registrant or any predecessor of the
Registrant or serves or served any other enterprise as a director, officer or
employee at the request of the Registrant or an predecessor of the Registrant.
The Registrant's Bylaws also provide that the Registrant may enter into one or
more agreements with any person which provides for indemnification greater or
different than that provided in such Certificate of Incorporation.

The Registrant has entered into indemnification agreements with its
directors and its officers.

The Registrant intends to purchase and maintain insurance on behalf of any
person who is a director or officer against any loss arising from any claim
asserted against him and incurred by him in any such capacity, subject to
certain exclusions.

II-1
<PAGE> 30

See also the undertakings set out in response to Item 17 herein.

ITEM 16. EXHIBITS.

The following exhibits are filed with this Registration Statement:

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
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(13)
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(2)
4.2 Common Stock Purchase Agreement by and among the Company and
certain entities and individuals dated June 10, 1996(3)
4.3 Common Stock Purchase Agreement by and among the Company and
certain entities and individuals dated August 6, 1997(4)
4.4 Preferred Stock Regulation D Subscription Agreement(5)
4.5 Certificate of Designation of Series A Preferred Stock of
Aureal Semiconductor Inc.(5)
4.6 Preferred Stock Registration Rights Agreement(5)
4.7 Aureal Semiconductor Inc. Regulation D Subscription
Agreement for Series C Preferred Stock(6)
4.8 Certificate of Designation of Series C Preferred Stock of
Aureal Semiconductor Inc.(6)
4.9 Registration Rights Agreement (Common Stock underlying
Series C Preferred Stock)(6)
4.10 Loan and Security Agreement (Goldman and TBCC Credit
Facility)(7)
4.11 Form of Warrant (Goldman and TBCC Warrants)(7)
4.12 8% Series B Convertible Preferred Stock Purchase
Agreement(7)
4.13 Certificate of Designation of 8% Series B Convertible
Preferred Stock for Aureal Semiconductor Inc.(7)
4.14 Amendment Number 4 to Registration Rights Agreement(7)
4.15 Form of Subscription Agreement
4.16 Form of Instructions to Stockholders
4.17 Form of Letter to Common Stockholders (Record)
4.18 Form of Letter to Banks and Brokers
4.19 Form of Letter to Common Stockholders (Beneficial)
10.1 Second Amended and Restated Loan Agreement between TCW
Special Credits and the Company dated August 6, 1997
increasing the loan commitment from $20 million to $31.5
million(8)
10.2 1995 Stock Option Plan(9)
10.3 Form of incentive option agreement and non-statutory stock
option agreement used under 1995 Stock Option Plan(2)
10.4 1994 Stock Option Plan(13)
10.5 Form of incentive option agreement and non-statutory stock
option agreement used under 1994 Stock Option Plan(13)
10.6 Industrial Space Sublease with Chemical Waste Management,
Inc. dated September 13, 1995(2)
</TABLE>

II-2
<PAGE> 31

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
10.7 Form of Indemnity Agreement for Directors and Officers(10)
10.8 1996 Outside Directors Stock Option Plan(11)
10.9 Manufacturing, Purchase and Distribution Agreement between
Diamond Multimedia Systems, Inc. and Aureal dated July 3,
1998(12)
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1)
24.1 Power of Attorney (see page II-6 of the Registration
Statement)
</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 10-K for the year
ended December 31, 1995.

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

(4) Incorporated by reference to the exhibits filed with Form S-3 (as amended
by Post-Effective Amendment No. 1, Registration number 333-3870) filed
September 12, 1997.

(5) Incorporated by reference to the exhibits filed with Aureal's Form 8-K on
March 16, 1998.

(6) Incorporated by reference to the exhibits filed with Aureal's Form 8-K on
June 15, 1998.

(7) Incorporated by reference to the exhibits filed with Form 8-K dated June
15, 1998.

(8) Incorporated by reference to the exhibits filed with Form 10-Q for the
quarter ended September 28, 1997.

(9) Incorporated by reference to the exhibits filed with Aureal's preliminary
proxy on November 5, 1998.

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

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

(12) Incorporated by reference to the exhibits filed with Form 10-Q for the
quarter ended June 28, 1998.

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

ITEM 17. UNDERTAKINGS.

I. The undersigned Registrant hereby undertakes:

A. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;

II-3
<PAGE> 32

1. To include any prospectus required by section 10(a)(3) of the
Securities Act;

2. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee "table in the effective registration statement;

3. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.

B. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

C. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

III. The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.

IV. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as

II-4
<PAGE> 33

expressed in The Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

V. The undersigned Registrant hereby undertakes that:

A. For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4)or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.

B. For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-5
<PAGE> 34

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Fremont, State of
California on the 1st day of April, 1999.

AUREAL SEMICONDUCTOR INC.

By: /s/ DAVID J. DOMEIER
-----------------------------------
David J. Domeier
Vice President, Finance and
Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Kenneth A. Kokinakas and David J. Domeier and each of
them, acting together or alone, his true and lawful attorneys-in-fact and agents
with full power of substitution, in his name, place and stead to execute on his
behalf, in his capacity as a director and/or officer of AUREAL SEMICONDUCTOR
INC. (the "Company"), a registration statement on Form S-3 or other appropriate
form and any and all amendments thereto (including post-effective amendments),
registering shares of the common stock of the Company, to be filed with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act and any and all instruments which said attorneys-in-fact and agents deem
necessary or advisable to enable the Company to comply with the Securities Act
and the rules, regulations and requirements of the Commission in respect
thereof, giving and granting to said attorneys-in-fact and agents, and each of
them, acting together or alone, full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or would do if personally
present at the doing thereof, with full power of substitution and revocation,
hereby ratifying and confirming all that his said attorneys-in-fact or
substitutes may or shall lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated:
April 1, 1999

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

/s/ KENNETH A. KOKINAKAS President, Chief Executive Officer
- -------------------------------------
Kenneth A. Kokinakas

/s/ DAVID J. DOMEIER Vice President, Chief Financial
- ------------------------------------- Officer and Chief Accounting Officer
David J. Domeier

Director
- -------------------------------------
L. William Krause
</TABLE>

II-6
<PAGE> 35

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ D. RICHARD MASSON Director
- -------------------------------------
D. Richard Masson

/s/ THOMAS K. SMITH, JR. Director
- -------------------------------------
Thomas K. Smith, Jr.

/s/ RICHARD E. CHRISTOPHER Director
- -------------------------------------
Richard E. Christopher
</TABLE>

II-7
<PAGE> 36

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
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(13)
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(2)
4.2 Common Stock Purchase Agreement by and among the Company and
certain entities and individuals dated June 10, 1996(3)
4.3 Common Stock Purchase Agreement by and among the Company and
certain entities and individuals dated August 6, 1997(4)
4.4 Preferred Stock Regulation D Subscription Agreement(5)
4.5 Certificate of Designation of Series A Preferred Stock of
Aureal Semiconductor Inc.(5)
4.6 Preferred Stock Registration Rights Agreement(5)
4.7 Aureal Semiconductor Inc. Regulation D Subscription
Agreement for Series C Preferred Stock(6)
4.8 Certificate of Designation of Series C Preferred Stock of
Aureal Semiconductor Inc.(6)
4.9 Registration Rights Agreement (Common Stock underlying
Series C Preferred Stock)(6)
4.10 Loan and Security Agreement (Goldman and TBCC Credit
Facility)(7)
4.11 Form of Warrant (Goldman and TBCC Warrants)(7)
4.12 8% Series B Convertible Preferred Stock Purchase
Agreement(7)
4.13 Certificate of Designation of 8% Series B Convertible
Preferred Stock for Aureal Semiconductor Inc.(7)
4.14 Amendment Number 4 to Registration Rights Agreement(7)
4.15 Form of Subscription Agreement
4.16 Form of Instructions to Stockholders
4.17 Form of Letter to Common Stockholders (Record)
4.18 Form of Letter to Banks and Brokers
4.19 Form of Letter to Common Stockholders (Beneficial)
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
10.1 Second Amended and Restated Loan Agreement between TCW
Special Credits and the Company dated August 6, 1997
increasing the loan commitment from $20 million to $31.5
million(8)
10.2 1995 Stock Option Plan(9)
10.3 Form of incentive option agreement and non-statutory stock
option agreement used under 1995 Stock Option Plan(2)
10.4 1994 Stock Option Plan(13)
10.5 Form of incentive option agreement and non-statutory stock
option agreement used under 1994 Stock Option Plan(13)
10.6 Industrial Space Sublease with Chemical Waste Management,
Inc. dated September 13, 1995(2)
10.7 Form of Indemnity Agreement for Directors and Officers(10)
10.8 1996 Outside Directors Stock Option Plan(11)
</TABLE>
<PAGE> 37

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
10.9 Manufacturing, Purchase and Distribution Agreement between
Diamond Multimedia Systems, Inc. and Aureal dated July 3,
1998(12)
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1)
24.1 Power of Attorney (see page II-6 of the Registration
Statement)
</TABLE>