<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q
(Mark One)
 [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the Quarterly period ended  December 31, 1999
                                ------------------

                                       OR

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

Commission File Number  1-14007
                        -------

                              SONIC FOUNDRY, INC.
                              -------------------
             (Exact name of registrant as specified in its charter)

               MARYLAND                             39-1783372
     -------------------------------            -------------------
     (State or other jurisdiction of             (I.R.S. Employer
     incorporation or organization)             Identification No.)

                   754 Williamson Street, Madison, WI 53703
                   ----------------------------------------
                   (Address of principal executive offices)

                                 (608)256-3133
                                 -------------
                            (Registrant's telephone
                          number including area code)

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

State the number of shares outstanding of each of the issuer's common equity as
of the last practicable date:
                                                  Outstanding
                  Class                         February 8, 2000
                  -----                         ----------------
             Common Stock, $0.01 par value         8,071,054
<PAGE>

                              SONIC FOUNDRY, INC.

                         QUARTERLY REPORT ON FORM 10-Q
                        QUARTER ENDED DECEMBER 31, 1999


                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                        PAGE NO.
                                                                        -------
<S>       <C>                                                           <C>
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

          Balance Sheets - December 31, 1999 (Unaudited) and
          September 30, 1999................................................3

          Statements of Operations (Unaudited) - three-months ended
          December 31, 1999 and 1998........................................5

          Statements of Cash Flows (Unaudited) - three-months
          ended December 31, 1999 and 1998..................................6

          Notes to Financial Statements (Unaudited).........................7

Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations...............................9

Item 3.   Quantitative and Qualitative Disclosures
          About Market Risk................................................14

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings................................................15

Item 2.   Changes in Securities and Use of Proceeds........................15

Item 3.   Defaults upon Senior Securities..................................16

Item 4.   Submission of Matters to a Vote of Security Holders..............16

Item 5.   Other Information................................................16

Item 6.   Exhibits and Reports on Form 8-K.................................16

</TABLE>

                                       2
<PAGE>

                              Sonic Foundry, Inc.

                                 Balance Sheets

<TABLE>
<CAPTION>

                                                                      December 31        September 30
                                                                         1999               1999
                                                                      -------------------------------
<S>                                                                   <C>                 <C>
Assets                                                                (Unaudited)
Current assets:
 Cash and cash equivalents                                            $ 2,825,652         $ 5,889,107
 Marketable securities
 Accounts receivable, net of allowances of $1,059,581 and               4,762,984           3,760,720
  $1,314,750 at December 31, 1999 and September 30, 1999,
  respectively
 Inventories                                                            1,356,254           1,040,927
 Prepaid expenses and other current assets                              1,452,135             880,123
                                                                      -------------------------------
Total current assets                                                   10,397,025          11,570,877


Property and equipment:
 Land                                                                      95,000             190,000
 Buildings and improvements                                             1,501,056           1,737,962
 Equipment                                                              3,361,565           2,218,113
 Furniture and fixtures                                                   239,918             202,187
                                                                      -------------------------------
                                                                        5,197,539           4,348,262
 Less accumulated depreciation                                          1,116,527             923,051
                                                                      -------------------------------
Net property and equipment                                              4,081,012           3,425,211

Other assets:
  Capitalized software development costs, net                             519,083             643,220
  Long term investment                                                    513,787             513,787
  Other assets                                                            845,693             556,165
                                                                      -------------------------------
Total other assets                                                      1,878,563           1,713,172
                                                                      -------------------------------
Total assets                                                          $16,356,600         $16,709,260
                                                                      ===============================
</TABLE>

See accompanying notes.

                                       3
<PAGE>

                              Sonic Foundry, Inc.

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                      December 31        September 30
                                                                          1999               1999
                                                                      -------------------------------
<S>                                                                   <C>                <C>
Liabilities and stockholders' equity                                  (Unaudited)
Current liabilities:
 Accounts payable                                                     $ 2,937,707        $ 1,866,821
 Accrued liabilities                                                      837,795            812,401
 Current portion of long-term obligations                                 110,785             48,569
                                                                      ------------------------------
Total current liabilities                                               3,886,287          2,727,791

Long-term obligations                                                   2,187,454          5,234,525

Stockholders' equity:
 Preferred Stock, $.01 par value, authorized 5,000,000                       -                  -
  shares; none issued and outstanding
 5% preferred stock, Series B, voting, cumulative,                           -                  -
  convertible, $.01 par value (liquidation preference at
  par), authorized 10,000,000 shares, none issued and
  outstanding

 Common stock, $.01 par value, authorized 20,000,000 shares;               69,743             64,973
  6,974,231 and 6,497,249 shares issued and outstanding at
  December 31, 1999 and September 30, 1999
 Common stock warrants and options                                      1,827,375          1,011,375
 Additional paid-in capital                                            18,229,850         15,336,252
 Accumulated deficit                                                   (9,669,108)        (7,465,656)
 Unearned compensation                                                   (175,001)          (200,000)
                                                                      ------------------------------
Total stockholders' equity                                             10,282,859          8,746,944
                                                                      ------------------------------
Total liabilities and stockholders' equity                            $16,356,600        $16,709,260
                                                                      ==============================
</TABLE>

See accompanying notes.

                                       4
<PAGE>

                              Sonic Foundry, Inc.

                            Statements of Operations
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                           December 31,
                                                                     1999                1998
                                                                  -------------------------------
<S>                                                               <C>                 <C>
Net revenues:
 Software license fees                                            $ 5,067,348         $ 2,755,567
 Services                                                              36,204                -
                                                                  -------------------------------
  Total net revenues                                                5,103,552           2,755,567

Cost of revenues:
 Cost of software license fees                                      1,054,641             820,422
 Cost of services                                                     103,394                -
                                                                  -------------------------------
                                                                    1,158,035             820,422
                                                                  -------------------------------

  Gross profit                                                      3,945,517           1,935,145

Selling and marketing expenses                                      4,055,983           2,072,391
General and administrative expenses                                 1,452,232             774,896
Product development expenses                                        1,190,500             557,634
                                                                  -------------------------------
                                                                    6,698,715           3,404,921
                                                                  -------------------------------
Loss from operations                                               (2,753,198)         (1,469,776)

Other income (expense):
 Interest expense                                                    (166,466)             (3,595)
 Interest and other income                                            716,212              91,581
                                                                  -------------------------------
                                                                      549,746              87,986
                                                                  -------------------------------

Loss before income taxes                                           (2,203,452)         (1,381,790)
Income tax expense                                                                           -
                                                                  -------------------------------
Net Loss                                                          $(2,203,452)        $(1,381,790)
                                                                  ===============================

Loss per common share:
 Basic                                                            $     (0.33)        $     (0.52)
                                                                  ===============================
 Diluted                                                          $     (0.33)        $     (0.52)
                                                                  ===============================
</TABLE>

See accompanying notes.

                                       5
<PAGE>

                              Sonic Foundry, Inc.

                            Statements of Cash Flows
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                             Three months ended December 31,
                                                                                1999                 1998
                                                                            ---------------------------------
<S>                                                                         <C>                   <C>
Operating activities
Net loss                                                                    $(2,203,452)          $(1,381,790)
Adjustments to reconcile net loss to net cash used in operating
 activities:
  Depreciation and amortization                                                 193,476               106,875
  Amortization of capitalized software development costs                        124,137                66,431
  Noncash charge for common stock warrants                                      181,347                16,500
  Amortization of debt discount and debt issuance costs                          80,390                  -
  Amortization of unearned compensation                                          24,999                  -
  Gain on sale of assets and investments                                       (649,763)                 -
  Changes in operating assets and liabilities:
   Accounts receivable                                                       (1,002,264)             (893,986)
   Inventories                                                                 (315,327)             (209,690)
   Prepaid expenses and other assets                                             27,988                41,334
   Accounts payable and accrued liabilities                                   1,147,479                 6,323
                                                                            ---------------------------------
Total adjustments                                                              (157,538)             (866,213)
                                                                            ---------------------------------
Net cash used in operating activities                                        (2,390,990)           (2,248,003)

Investing activities
Purchases of property and equipment                                          (1,199,513)             (339,877)
Sales of property and equipment                                                 400,000                  -
                                                                            ---------------------------------
Net cash used in investing activities                                          (799,513)             (339,877)

Financing activities
Proceeds from sale of common stock, net of issuance costs                         8,400                  -

Proceeds from long-term debt                                                    140,797                  -
Payments on long-term debt                                                      (22,149)             (612,552)
                                                                            ---------------------------------
Net cash provided by (used) in financing activities                             127,048              (612,552)
                                                                            ---------------------------------

Net decrease in cash                                                         (3,063,455)           (3,200,432)
Cash and cash equivalents at beginning of period                              5,889,107             6,939,533
                                                                            ---------------------------------
Cash and cash equivalents at end of period                                  $ 2,825,652           $ 3,739,101
                                                                            =================================

Supplemental cash flow information:
 Interest paid                                                              $    14,266           $     3,595
 Noncash transactions -
  Issuance of Warrants                                                          696,000
  Conversion of subordinated debt and associated debt issuance
   costs and accrued interest into common stock                               2,889,968                     -
</TABLE>

See accompanying notes.

                                       6
<PAGE>

1.   Basis of Presentation and Significant Accounting Policies

Interim Financial Data

The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the Company's annual report filed on Form 10-
K for the fiscal year ended September 30, 1999. In the opinion of management,
all adjustments (consisting only of adjustments of a normal and recurring
nature) considered necessary for a fair presentation of the results of
operations have been included.  Operating results for the three-month period
ended December 31, 1999 are not necessarily indicative of the results that might
be expected for the year ended September 30, 2000.

Net Loss Per Share

The following table sets forth the computation of basic and diluted loss per
share:

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                              December 31,
                                                           1999         1998
                                                         ----------------------
     <S>                                                 <C>          <C>
     Denominator
     Denominator for basic and diluted loss per
      share - weighted average common shares             6,698,390    2,665,935
                                                         ======================

     Securities that could potentially dilute basic
      earnings per share in the future that are not
      included in the computation of diluted loss
      per share as their impact is antidilutive
      (treasury stock method)
          Options and warrants                             543,453      491,404
          Convertible debt                                 155,642         -
          Convertible Series B Preferred Stock                -       3,611,860
</TABLE>

                                       7
<PAGE>

2.   Subsequent Events

In February 2000, the Company issued a Notice of Redemption to holders of its
public warrants and fixed February 21, 2000 as the redemption date.  Each public
warrant is exercisable to purchase one share of common stock at a price of
$11.25 until 5:30 p.m. Eastern Standard Time on February 18, 2000. If the
warrants are not exercised by such time, the warrant holders of record shall be
entitled only to payment of the redemption price of $0.10 per warrant upon
surrender of the warrant. Any warrants not surrendered will not be entitled to
payment.  The Company anticipates proceeds of nearly $13 million from the
exercise of warrants.

In January 2000, the remaining convertible debt obligation of $1.6 million and
the associated accrued interest was converted into common stock.  The conversion
resulted in the issuance of 156,996 shares of common stock.

In February 2000, the Company issued 500,000 shares of common stock to a group
of institutional investors. The Company received proceeds of approximately $24
million, before payment of commissions and other related expenses.


3.   Contingencies

In June 1998 the Board of Directors approved the issuance of guarantees of
certain obligations of certain officers of the Company.  The guarantees were
executed in June and July of 1998 to a bank in order to facilitate the issuance
of loans to the officers.  The guarantees carry an aggregate maximum limit of
approximately $375,000.


                                       8
<PAGE>

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

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the financial statements and
notes thereto included elsewhere in this form 10-Q and the Company's annual
report filed on form 10-K for the fiscal year ended September 30, 1999. In
addition to historical information, this discussion contains forward-looking
statements such as statements of the Company's expectations, plans, objectives
and beliefs. These statements use such words as "may", "will", "expect",
"anticipate", "believe", "plan", and other similar terminology. Actual results
could differ materially due to changes in the market acceptance of Sonic
Foundry's products, market introduction or product development delays, global
and local business conditions, legislation and governmental regulations,
competition, the Company's ability to effectively maintain and update its
product portfolio, shifts in technology, political or economic instability in
local markets, and currency and exchange rates.

Overview

Background

We began shipment of Sound Forge, a Windows based audio editing software program
developed by one of our founders, in 1993.  By 1996, we had released Sound Forge
versions 3.0 and 4.0, which significantly expanded the effects and processes
available in our audio editor, thereby meeting the needs of professional
musicians and audio engineers.  At that time, we expanded the product line to
include Sound Forge XP, a scaled down version of Sound Forge, as well as various
plug-in products whose functions include noise reduction, spectrum analysis and
batch conversion. In June 1997, we released CD Architect, an audio mastering
software product and in May 1998, we released a music creation software product
called ACID. ACID allows musicians, media professionals, Internet developers and
others to compose royalty free, loop based music.  Additionally, in October
1998, we introduced consumer versions of ACID for home entertainment use. Both
ACID products are supported by loop library CD's which offer professionals and
consumers a variety of music genres to choose from when composing music.  In May
1999 we introduced our first product targeted to an office environment, Audio
Anywhere, which combines existing products, ACID and Sound Forge XP, to produce
multimedia content for use with Microsoft Office 2000.  We released Vegas Pro in
July 1999 as a multi-track digital audio editor developed for professional audio
and video users.  In September 1999, we released Stream Anywhere, a software
tool that allows website developers to translate or encode audio and video media
in either the Microsoft Windows Media Technologies or RealNetworks' RealSystem
G2 streaming format.  We also released Siren in a beta form in September 1999
and began licensing for versions of it to hardware manufacturers such as Hewlett
Packard for CD recordable drives.  Siren is a comprehensive digital music
management system that allows PC users to locate and download digital music from
the Internet, record music from their personal CD collection to their PC hard
drive, and manage the music in multiple play list arrangements on their PC. In
addition, Siren provides seamless transfer to portable digital players and
traditional CD players.  In October 1999, we announced the formation of and
significant investment in a media services division - a new business unit
designed specifically to offer complete encoding services to the music, film,
broadcast, and corporate markets.

                                       9
<PAGE>

Revenues

Revenues consist of fees charged for the licensing of Windows based software
products. Prior to June 1997 we generated revenues primarily from sales of our
Sound Forge family of products.  Since June 1997, we have generated revenues
from sales of our expanded product line that includes Sound Forge, Sound Forge
XP, CD Architect, Acoustic Mirror, Soft Encode, ACID, Stream Anywhere, Audio
Anywhere, Vegas, Siren and various plug-in products and music libraries.  To
date, we have recorded limited revenues from our media services division.

We recognize revenues upon delivery, net of allowances for estimated returns,
provided that we have no significant obligations remaining and collection of the
resulting receivable is deemed probable.  We recognize revenues from software
license agreements with OEMs when the following conditions are met: the
software product has been delivered to the OEM, our fee is fixed and/or
determinable, and collectibility is probable.  Additionally, revenues include
fees recorded pursuant to long-term contracts, using the percentage of
completion method of accounting, when significant customization or modification
is required.  Efforts to develop further OEM transactions and enter new markets
and distribution channels have resulted in and are expected to continue to
result in significant quarter to quarter variability in revenues.

Cost of Revenues

Cost of revenues include product material costs, contracted and internal
assembly labor, freight, royalties on third party technology or intellectual
content and amortization of previously capitalized product development costs.
We have experienced wide fluctuations in costs of revenues as a percentage of
revenues due to variations in product mix.  We have sold our software products
bundled with purchased third party hardware, which results in higher costs as a
percentage of revenue.  We incur no costs of revenues in connection with OEM
sales where our customers bundle our software products with their hardware.

Selling and Marketing Expenses

Selling and marketing expenses include wages and commissions for sales,
marketing and technical support personnel, as well as advertising, direct mail,
trade show and various promotional expenses and product rebates.  Timing of
these costs vary greatly depending on introduction of new products or entrance
into new markets.  For example, during the quarter ended December 31, 1998, we
initiated a marketing campaign for our consumer products, ACID Music, ACID DJ
and ACID Rock.  Additionally, in June 1999, we took part in a series of
promotional programs, including rebates, store demos, fliers, and end-cap
displays to promote our Audio Anywhere product in conjunction with the
introduction of Microsoft Office 2000.  We believe that our success depends
largely on developing brand recognition early in a product's life cycle.
Accordingly, we expect selling and marketing costs to increase in the near
future, especially in periods of new product or market introductions.

                                       10
<PAGE>

General and Administrative Expenses

General and administrative expenses consist of costs associated with facilities,
finance, legal, management information systems and various employee benefits not
fully allocated to functional areas.

Product Development Expenses

Product development expenses include salaries and wages of the software research
and development staff and an allocation of benefits, facility and administrative
expenses, net of product development expenses capitalized pursuant to SFAS No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed."  We believe that continued investment in research and
development is critical to attaining our strategic objectives and, as a result,
we expect research and development expenses to increase significantly.

                                       11
<PAGE>

Results of Operations

Three Months Ended December 31, 1999 and 1998

Net revenues increased by $2,348,000 to $5,104,000 for the three-month period
ended December 31, 1999 from $2,756,000 during the three-month period ended
December 31, 1998.  The increase in revenues is primarily attributed to growth
in sales from OEM partners, consumer retail sales and direct.  Increased OEM
sales resulted from ongoing royalties associated with the bundling of ACID with
Hewlett Packard recordable CD drives.  Both the retail and direct channels were
driven by the recent introduction of new products, such as Vegas, Siren Jukebox,
the enhanced ACID version 2.0 family of products as well as localized ACID in
three languages.  An aggressive marketing campaign consisting of radio and TV
ads and a product catalog mailing to over one million potential buyers further
drove sales of new and existing products.

Net revenues from international customers accounted for 13% and 15% of total net
revenues for the three-month periods ended December 31, 1999 and 1998,
respectively.

Cost of net revenues increased by $338,000 to $1,158,000 for the three-month
period ended December 31, 1999 from $820,000 during the three-month period ended
December 31, 1998 and were 23% and 30% of net revenues during the 1999 and 1998
periods, respectively.  The increase in absolute dollars resulted primarily from
depreciation and personnel costs associated with the establishment of our new
Media Services facility as well as an increase in the volume of software
products sold during the period.  The decrease as a percentage of net revenues
is the result of an increase in OEM sales as well as an increase in the number
of downloadable products being sold from our website.

Selling and marketing expenses increased by $1,984,000 to $4,056,000 during the
three-month period ended December 31, 1999 from $2,072,000 during the three-
month period ended December 31, 1998.  Selling and marketing expenses as a
percentage of net revenues were 79% and 75% for the 1999 and 1998 periods,
respectively. Nearly half of the increase resulted from the acquisition of
targeted mailing lists and the development and distribution of approximately one
million product catalogs.  Another significant component of the increase in
selling and marketing expenses resulted from increased consumer marketing during
the holiday season consisting of radio and TV advertising, special promotions,
print ads and other marketing programs.  The remaining increase related to
personnel costs to support the growth in historical revenues and initial
marketing efforts for the new Media Services division.

General and administrative expenses increased by $677,000 to $1,452,000 during
the three-month period ended December 31, 1999 from $775,000 during the three-
month period ended December 31, 1998.  General and administrative expenses as a
percentage of net revenues were 28% during both the 1999 and 1998 periods.  The
increase in absolute dollars related to increases in wages and related
recruitment and benefit costs, professional fees, depreciation, and other
expenses required to build an infrastructure to support current and future
products.

                                       12
<PAGE>

Product development expenses increased by $632,000 to $1,190,000 during the
three-month period ended December 31, 1999 from $558,000 during the three-month
period ended December 31, 1998.  Product development expenses as a percentage of
net revenues were 23% and 20% for the 1999 and 1998 periods, respectively.  In
accordance with SFAS Number 86, the Company capitalizes the cost of development
of software products that have reached the level of technological feasibility.
No development costs were capitalized during either of the three-month periods
ended December 31, 1999 or 1998.  The addition of software engineers to
accelerate development of the Company's expanding line of software products, as
well as efforts expended to establish our Media Services division and add to a
host of internally used filtering algorithms, caused the increase in product
development costs between the two periods.

Other interest and income increased by $624,631 to $716,212 during the three-
month period ended December 31, 1999 from $91,581 during the three-month period
ended December 31, 1998.  The increase is due to a gain on sale of real estate
no longer needed by the Company and a gain on the sale of stock from an
investment that was made in a company that develops high speed networking
products.

No Federal or State tax expense was recorded during either of the quarters ended
December 31, 1999 or 1998 due to the Company's Federal and State net operating
loss position.  No deferred tax benefit was recorded in the quarter ended
December 31, 1999 as the Company continues to record a valuation allowance equal
to the balance of net deferred tax assets.

Liquidity and Capital Resources

Cash was used in operating activities of $2,391,000 and $2,248,000 for the
three-month periods ended December 31, 1999 and 1998, respectively.  Promotional
activities associated with gaining consumer recognition of the Company's
products contributed to a loss and use of cash, of $2,203,000 and $1,382,000 in
1999 and 1998, respectively. Additional investments in accounts receivable,
inventory and other assets of $1,290,000 and $1,065,000 also impacted cash used
in operations for the three-month periods ended December 31, 1999 and 1998,
respectively.  Cash invested in such assets for the three-month periods ended
December 31, 1999 and 1998 were partially offset by additional credit obtained
from trade creditors of $1,147,000 and $6,000, respectively.  The impact of
noncash charges such as depreciation, amortization, issuance of common stock
warrants and gains on sale for the three-month periods ended December 31, 1999
and 1998 totaled $(45,000) and $190,000, respectively.

Cash used in investing activities of $800,000 and $340,000 for the three-month
periods ended December 31, 1999 and 1998, respectively, included purchases of
fixed assets of $1,200,000 and $340,000, respectively. Fixed asset additions
including network, storage and media acquisition equipment for the new Media
Services division drove expenditures during 1999 while leasehold expenditures
for the company's administrative and engineering offices impacted 1998 in
addition to purchases of computers, furniture and other assets necessary to
outfit the growth in employees.  Cash used in investing activities in 1999 was
partially offset by the December 1999 sale of real estate no longer needed in
the Company's operations.

                                       13
<PAGE>

Cash provided by financing activities of $127,000 for the three-month period
ended December 31, 1999 included the proceeds from capital lease transactions
for equipment needed to establish the Company's Media Services operations.  Cash
used in financing activities of $613,000 for the three-month period ended
December 31, 1998 was impacted by the repayment of a mortgage.

We expect to experience significant growth in operating expenses, particularly
research and development and sales and marketing expenses, for the foreseeable
future in order to execute our business plan. As a result, we anticipate that
such operating expenses, as well as planned capital expenditures, will
constitute a material use of our cash resources. In addition, we may utilize
cash resources to fund acquisitions or investments in complementary businesses,
technologies or product lines. Management believes that the net proceeds from
the exercise of public and private warrants occuring in January and February,
2000 together with proceeds received from a private placement of restricted
common stock occurring in February 2000, will enable it to meet its operational
and capital requirements for at least the next 12 months.


Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Because our cash equivalents consist of overnight investments in money market
funds, we will not experience decreases in principal value associated with a
decline in interest rates.  Although we license our software to customers
overseas in U.S. dollars, we have exposure to foreign currency fluctuations
associated with liabilities, bank accounts and other assets maintained by our
office in the Netherlands.  We currently do not hedge our exposure to foreign
currency fluctuations, which have historically been immaterial.

                                       14
<PAGE>

PART II  OTHER INFORMATION


Item 1.  LEGAL PROCEEDINGS

We are not involved in any material legal proceedings.


Item 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None

(b) None

(c) Between October 1, 1999 and December 31, 1999, the Company issued
    unregistered securities as follows:

(1) The issuance of 207,500 warrants to consultants in December 1999.  These
issuances of warrants were made in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act, relating to sales by an issuer
not involving a public offering. Based on a discussion with such investors, the
Registrant reasonably believes that such investors were accredited and
sophisticated investors.  By virtue of their relation to the Registrant, these
investors had access to information on the Registrant necessary to make an
informed investment decision. No underwriters were engaged in connection with
these issuances.  Consideration received by the registrant consisted of
consulting and public relation services.

(2) The issuance of 167,000 options granted to employees. These issuances of
options were made in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act, relating to sales by an issuer not involving
a public offering.  Based on a close working relationship with such optionees,
along with various discussions with such optionees, the Registrant reasonably
believes that such optionees were accredited and/or sophisticated investors. By
virtue of their relation to the Registrant, these employees had access to
information on the Registrant necessary to make an informed decision.


(d) Use of Proceeds

The company's registration statement under the Securities Act for its initial
public offering became effective on April 22, 1998 (Registration No. 333-46005).
Offering proceeds, net of aggregate expenses of approximately $2.6 million, were
approximately $13.3 million. The company has used all of the net offering
proceeds. Of the net offering proceeds, $8.9 million was used for product
development, selling and marketing, expansion of internal operations, working
capital and general corporate purposes. In addition, the company repaid debt of
$1.7 million with a portion of the proceeds and invested $2.7 million in
facilities and other capital equipment. None of the net offering proceeds were
paid directly or indirectly to directors or officers of the company, persons
owning 10% or more of the company's securities, or affiliates of the company.

                                       15
<PAGE>

Item 3.    DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

Item 5.    OTHER INFORMATION

None.

Item 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits (see exhibit list)

(b) Reports on Form 8-K - None

                                       16
<PAGE>

<TABLE>
<CAPTION>

ITEM 6(a)    EXHIBIT LIST
<S>          <C>

NUMBER                                     DESCRIPTION
-----------  -------------------------------------------------------------------------------
<C>          <S>
3.1          Amended and Restated Articles of Incorporation of the Registrant, filed as
             Exhibit No. 3.1 to the Registration Statement, and hereby incorporated by
             reference.

3.2          Amended and Restated By-Laws of the Registrant, filed as Exhibit No. 3.2 to the
             Registration Statement, and hereby incorporated by reference.

4.1          Specimen Common Stock Certificate, filed as Exhibit No. 4.1 to the Registration
             Statement, and hereby incorporated by reference.

4.2          Form of Warrant Agreement, including Warrant Certificate, filed as Exhibit No.
             4.2 to the Registration Statement, and hereby incorporated by reference.

4.3          Form of Representatives' Warrant Agreement, including Specimen Representatives'
             Warrant Certificate, filed as Exhibit No. 4.3 to the Registration Statement,
             and hereby incorporated by reference.

10.1         Registrant's 1995 Stock Option Plan, filed as Exhibit No. 10.1 to the
             Registration Statement, and hereby incorporated by reference.

10.2         Registrant's Non-Employee Directors' Stock Option Plan, filed as Exhibit No.
             10.2 to the Registration Statement, and hereby incorporated by reference.

10.3         Commercial Lease between Registrant and The Williamson Center, LLC regarding
             740 and 744 Williamson Street, Madison, Wisconsin dated January 20, 1998, filed
             as Exhibit No. 10.3 to the Registration Statement, and hereby incorporated by
             reference.

10.4         Employment Agreement between Registrant and Rimas Buinevicius dated as of
             November 30, 1997 and effective as of January 1, 1997, filed as Exhibit No.
             10.4 to the Registration Statement, and hereby incorporated by reference.

10.5         Employment Agreement between Registrant and Monty R. Schmidt dated as of
             November 30, 1997 and effective as of January 1, 1997, filed as Exhibit No.
             10.5 to the Registration Statement, and hereby incorporated by reference.

10.6         Employment Agreement between Registrant and Curtis J. Palmer dated as of
             November 30, 1997 and effective as of January 1, 1997, filed as Exhibit No.
             10.6 to the Registration Statement, and hereby incorporated by reference.

10.7         Digital Audio System License Agreement between Registrant and Dolby
             Laboratories Licensing Corporation dated July 28, 1997, filed as Exhibit No.
             10.7 to the Registration Statement, and hereby incorporated by reference.

10.8         Digital Audio System License Agreement between Registrant and Dolby
             Laboratories Licensing Corporation dated July 28, 1997, filed as Exhibit No.
             10.8 to the Registration Statement, and hereby incorporated by reference.
</TABLE>

                                       17
<PAGE>

<TABLE>
<S>          <C>
10.9         Start-up Agreement between Registrant and Ingram Micro Inc. dated October 16,
             1997, filed as Exhibit No. 10.9 to the Registration Statement, and hereby
             incorporated by reference.

10.10        Form of Lock-up Agreement between Registrant and all directors, officers, and
             non-selling stockholders, filed as Exhibit No. 10.10 to the Registration
             Statement, and hereby incorporated by reference.

10.11        Form of Lock-up Agreement between Registrant and all selling stockholders,
             filed as Exhibit No. 10.11 to the Registration Statement, and hereby
             incorporated by reference.

10.12        Software License Agreement, effective as of September 29, 1998, between
             Registrant and Hewlett-Packard Company - CONFIDENTIAL MATERIAL FILED SEPARATELY

10.13        Commercial Lease between Registrant and Seven J's, Inc. regarding 627
             Williamson Street, Madison, Wisconsin dated March 26, 1999, filed as Exhibit
             No. 10.13 to the Quarterly Report on form 10-QSB for the period ended March 31,
             1999, and hereby incorporated by reference.

10.14        Loan Agreement, dated March 3, 1999 between Registrant and Associated Bank
             South Central, filed as Exhibit No. 10.14 to the Quarterly Report on form
             10-QSB for the period ended March 31, 1999, and hereby incorporated by
             reference.

10.15        Business Note Agreement, dated March 3, 1999 between Registrant and Associated
             Bank South Central, filed as Exhibit No. 10.15 to the Quarterly Report on form
             10-QSB for the period ended March 31, 1999, and hereby incorporated by
             reference.

10.16        Termination Statement between Registrant and Associated Bank South Central,
             effective June 30, 1999, filed as Exhibit No. 10.16 to the Quarterly Report on
             form 10-QSB for the period ended June 30, 1999, and hereby incorporated by
             reference.

10.17        Convertible Debenture Purchase Agreement dated September 13, 1999 between
             Purchasers and the Registrant filed as Exhibit No. 10.17 to the Current Report
             on form 8-K filed on September 24, 1999, and hereby incorporated by reference.

10.18        Commercial Lease between Registrant and Tenney Place Development, LLC
             regarding 1617 Sherman Ave., Madison, Wisconsin dated October 1, 1999, filed as
             Exhibit No. 10.18 to the Annual Report on form 10-K for the period ended
             September 30, 1999 and hereby incorporated by reference.

27.1         Financial Data Schedule.
</TABLE>

                                       18
<PAGE>

                                  SIGNATURES

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

                              Sonic Foundry, Inc.
                              -------------------
                                  (Registrant)


February 14, 2000                           By:  /s/ Rimas P. Buinevicius
                                                 ------------------------
                                                 Rimas P. Buinevicius
                                                 Chairman and Chief Executive
                                                 Officer

February 14, 2000                           By:  /s/ Kenneth A. Minor
                                                 --------------------
                                                 Kenneth A. Minor
                                                 Chief Financial Officer

February 14, 2000                           By:  /s/ Frederick Kopko
                                                 -------------------
                                                 Frederick Kopko
                                                 Secretary

                                       19