<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    March 31, 2002
                                    --------------

                                       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.)

                     1617 Sherman Avenue, Madison, WI 53704
                     --------------------------------------
                    (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                                  May 13, 2002
                 -----                                  ------------
      Common Stock, $0.01 par value                      27,121,736

<PAGE>

                              SONIC FOUNDRY, INC.
                         QUARTERLY REPORT ON FORM 10-Q
                          QUARTER ENDED MARCH 31, 2002



                                TABLE OF CONTENTS

                                                                        PAGE NO.
                                                                        --------

PART I   FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

         Consolidated Balance Sheets - March 31, 2002 (Unaudited)
           and September 30, 2001............................................3

         Consolidated Statements of Operations (Unaudited) - Three
           months ended March 31, 2002 and 2001 and six
           months ended March 31, 2002 and 2001..............................5

         Consolidated Statements of Cash Flows (Unaudited) -
           Six months ended March 31, 2002 and 2001..........................6

         Notes to Consolidated Financial Statements (Unaudited)..............8

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations..............................14

Item 3.  Quantitative and Qualitative Disclosures
           About Market Risk................................................25

PART II  OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds..........................27

Item 4.  Submission of Matters to a Vote of Security Holders................29

Item 5.  Other Information..................................................29

Item 6.  Exhibits and Reports on Form 8-K...................................31


<PAGE>

                               Sonic Foundry, Inc.
                           Consolidated Balance Sheets
                        (in 000's except for share data)


<TABLE>
<CAPTION>
                                                                             March 31,       September 30,
                                                                               2002              2001
                                                                      ----------------------------------------
                                                                           (Unaudited)
<S>                                                                 <C>                <C>
Assets
Current assets:
 Cash and cash equivalents                                            $        8,134     $        7,809
 Restricted cash                                                               1,000                  -
 Accounts receivable, net of allowances of $788 and $1,075                     4,207              4,065
 Accounts receivable, other                                                       68                 26
 Inventories                                                                     537              1,118
 Prepaid expenses and other current assets                                       733              1,085
                                                                      ----------------------------------------
Total current assets                                                          14,679             14,103

Property and equipment:
 Buildings and improvements                                                    2,409              2,409
 Equipment                                                                    13,347             13,823
 Furniture and fixtures                                                          542                542
 Assets held for sale                                                             40                 40
                                                                      ----------------------------------------
  Total property and equipment                                                16,338             16,814
 Less accumulated depreciation                                                 6,304              5,010
                                                                      ----------------------------------------
Net property and equipment                                                    10,034             11,804

Other assets:
 Goodwill and other intangibles, net                                           8,171             44,732
 Capitalized software development costs and purchased technology,
  net                                                                          1,550                 73
 Long-term investment                                                            514                514
 Debt issue costs, net                                                           778                  -
 Other assets                                                                     32                457
                                                                      ----------------------------------------
Total other assets                                                            11,045             45,776
                                                                      ----------------------------------------
Total assets                                                          $       35,758     $       71,683
                                                                      ========================================
</TABLE>
See accompanying notes.

                                       3

<PAGE>

                               Sonic Foundry, Inc.
                           Consolidated Balance Sheets
                        (in 000's except for share data)

<TABLE>
<CAPTION>
                                                                                 March 31,       September 30,
                                                                                   2002             2001
                                                                             ---------------------------------
                                                                               (Unaudited)
<S>                                                                             <C>               <C>
Liabilities and stockholders' equity
Current liabilities:
 Accounts payable                                                               $   2,857         $  2,316
 Unearned revenue                                                                      57               83
 Accrued liabilities                                                                1,926            1,719
 Accrued restructuring charges                                                        107              345
 Current portion of long-term debt                                                  3,987            4,003
 Current portion of capital lease obligations                                       1,159            1,216
                                                                                ------------------------------
Total current liabilities                                                          10,093            9,682

 Long-term obligations, net of current portion                                        153              217
 Capital lease obligations, net of current portion                                    154              525
 Convertible debt, net of discount                                                  1,582                -
 Other liabilities                                                                    110               28

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 100,000,000
  shares; 27,145,251 and 22,345,503 shares issued and
  27,117,501 and 22,317,753 outstanding at March 31, 2002 and September
  30, 2001                                                                            271              223
 Common stock to be issued                                                              -            5,375
 Additional paid-in capital                                                       166,172          148,188
 Accumulated deficit                                                             (142,510)         (92,248)
 Receivable for common stock issued                                                   (35)             (34)
 Cumulative foreign currency translations/adjustments                                  (3)               7
 Unearned compensation                                                                (79)            (130)
 Treasury stock, at cost, 27,750 shares                                              (150)            (150)
                                                                                ------------------------------
Total stockholders' equity                                                         23,666           61,231
                                                                                ------------------------------
Total liabilities and stockholders' equity                                      $  35,758         $ 71,683
                                                                                ==============================
</TABLE>
See accompanying notes.
                                       4

<PAGE>

                               Sonic Foundry, Inc.
                            Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                        Three months ended       Six months ended
(in 000's except for per share data)         March 31,               March 31,
                                        -------------------------------------------
                                         2002        2001        2002        2001
                                        -------------------------------------------
<S>                                     <C>        <C>         <C>         <C>
Revenue:
   Software                             $ 3,608    $  4,534    $  7,161    $  8,522
   Media services                         2,438       2,730       4,785       5,260
   Media systems                            405          -          543          -
                                        -------------------------------------------
     Total revenue                        6,451       7,264      12,489      13,782

Cost of revenue:
   Cost of software                         846       1,790       1,809       3,194
   Cost of media services                 1,798       1,957       3,575       4,290
   Cost of media systems                    123          -          159          -
                                        -------------------------------------------
     Total cost of revenues               2,767       3,747       5,543       7,484
                                        -------------------------------------------
     Gross profit                         3,684       3,517       6,946       6,298

Operating expenses:
   Selling and marketing expenses         1,903       2,759       4,304       7,987
   General and administrative expenses    1,662       2,187       3,263       5,871
   Product development expenses           1,815       1,793       3,662       4,627
   Amortization of goodwill and
     other intangibles                       -        7,009          -       14,027
   Restructuring charges                     -           -           -        3,782
                                        -------------------------------------------
     Total operating expenses             5,380      13,748      11,229      36,294
                                        -------------------------------------------
     Loss from operations                (1,696)    (10,231)     (4,283)    (29,996)

Other income (expense):
   Interest expense                        (154)       (185)       (189)       (372)
   Non-cash interest expense               (858)         -         (858)         -
   Interest and other                      (204)        139        (200)        418
                                        -------------------------------------------
     Total other income (expense)        (1,216)        (46)     (1,247)         46
                                        -------------------------------------------
   Loss before cumulative effect of
     changes in accounting principle     (2,912)    (10,277)     (5,530)    (29,950)
   Cumulative effect of changes in
     accounting principle                    -           -      (44,732)         -
                                        -------------------------------------------
Net loss                                $(2,912)   $(10,277)   $(50,262)   $(29,950)
                                        ===========================================

Loss per common share:
   Loss before cumulative effect of
     changes in accounting principle    $  (.11)   $  (0.46)   $   (.21)   $  (1.36)
   Cumulative effect of changes in
     accounting principle                    -           -        (1.71)         -
                                        -------------------------------------------
    Net loss per common share - basic
     and diluted                        $  (.11)   $  (0.46)   $  (1.92)   $  (1.36)
                                        ===========================================
</TABLE>


See accompanying notes.

                                       5

<PAGE>

                               Sonic Foundry, Inc.
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                   Six months ended
                                                                                      March 31,
(in 000's)                                                                        2002         2001
                                                                                ---------------------
<S>                                                                             <C>          <C>
Operating activities

Net loss                                                                        $(50,262)    $(29,950)
Adjustments to reconcile net loss to net cash used in operating activities:
  Cumulative effect of change in accounting principle                             44,732            -
  Amortization of goodwill, other intangibles, purchased technology and
    capitalized software development costs                                           193       14,272
  Depreciation and amortization of property and equipment                          1,703        1,785
  Amortization of debt discount and debt issue costs                                 858            -
  Noncash charge for common stock warrants and options                               155          234
  Loss on sale of assets                                                             218        1,477
  Changes in operating assets and liabilities:
    Accounts receivable                                                             (176)       3,282
    Inventories                                                                      581          615
    Prepaid expenses and other assets                                                405          985
    Accounts payable and accrued liabilities                                      (2,340)      (2,271)
                                                                                ---------------------
Total adjustments                                                                 46,329       20,352
                                                                                ---------------------
Net cash used in operating activities                                             (3,933)      (9,598)

Investing activities

Acquisition, net of cash acquired                                                   (579)        (679)
Purchases of property and equipment                                                 (262)      (1,723)
Sales of property and equipment                                                        4        1,205
                                                                                ---------------------
Net cash used in investing activities                                               (837)      (1,197)

Financing activities

Proceeds from sale of common stock                                                   174          110
Proceeds from debt, net of commissions and issue costs                             6,675            -
Borrowings on line of credit, net                                                      -          571
Payments on long-term debt and capital leases                                       (757)      (1,507)
Cash placed in escrow                                                             (1,000)           -
                                                                                ---------------------
Net cash provided by (used in) financing activities                                5,092         (826)
Effect of exchange rate changes on cash                                                3            -
                                                                                ---------------------
Net increase (decrease) in cash                                                      325      (11,621)
Cash and cash equivalents at beginning of period                                   7,809       21,948
                                                                                ---------------------

Cash and cash equivalents at end of period                                      $  8,134     $ 10,327
                                                                                =====================
</TABLE>

See accompanying notes.

                                       6

<PAGE>

                               Sonic Foundry, Inc.
                Consolidated Statements of Cash Flows (continued)
                                   (Unaudited)

<TABLE>
<S>                                                                          <C>       <C>

Supplemental cash flow information:

   Interest paid                                                             $   70    $  192
Non-cash transactions -
     Capital lease acquisitions                                                  17        86
     Issuance of options for deferred compensation plan                         104         -
     Issuance of warrants for consulting services                                49        19
     Conversion of exchangeable stock into common stock                       5,375         -
     Issuance of common stock and stock options for MediaSite                 5,016         -
     Issuance of shares for Digital Savant                                      541         -
     Issuance of shares for accrued royalties                                   125         -
     Reclassification of goodwill to fixed assets upon final appraisal of
       International Image                                                        -     1,281
     Cancellation of unvested stock options classified as unearned
       compensation upon acquisition of STV                                       -     1,249

</TABLE>


                                       7

<PAGE>

1.   Basis of Presentation and Significant Accounting Policies

Interim Financial Data

The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States 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
accounting principles generally accepted in the United States 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, 2001. 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 six-month
period ended March 31, 2002 are not necessarily indicative of the results that
might be expected for the year ended September 30, 2002.

Revenue Recognition

Revenues from software license fees consist of fees charged for the licensing of
Windows-based software products. We recognize software product revenue upon
delivery, net of estimated returns, provided that collection is determined to be
probable and no significant obligations remain. Software product revenue from
distributors is subject to agreements allowing limited rights of return,
rebates, and price protection. Accordingly, we reduce revenue recognized for
estimated future returns, price protection when given, and rebates at the time
the related revenue is recorded or promotion is offered. The estimates for
returns are adjusted periodically based upon historical rates of returns,
estimated inventory levels in the distribution channel, and other related
factors. The estimates and reserves for rebates and price protection are based
on historical rates.

Delivery occurs through the following methods:

..    Direct Distribution: Direct revenues are recognized upon delivery to the
     end-user either via shipment of a boxed product from the Company's
     fulfillment contractor or electronic download. No returns are accepted.

..    Retail Distribution: Retail revenues are recognized upon delivery to a
     third-party distributor, net of allowances for estimated returns, rebates
     and price protection.

..    OEM: OEM revenues are generated through partnerships with hardware and
     software vendors who license the right to bundle one of the Company's
     products with the partner's products. Typically, this type of revenue is
     recognized as the partner sells through to the end-user.

                                       8

<PAGE>

..    Consulting: Consulting revenues include fees recorded pursuant to long-term
     contracts, using the percentage of completion method of accounting, when
     significant customization or modification of a product is required.

..    Consignment: Consignment revenues are recognized when a third-party
     reseller delivers the boxed product to their customer.

All software products sold include free installation support and professional
software products sold include 60 days of free telephone support. Costs
associated with free support are accrued at the date of sale because the free
support is not significant. Customers that require additional post-contract
customer support ("PCS") are charged a separate fee either through a telephone
charge or annual subscription charge. Revenue and associated costs for PCS are
recognized as the services are performed or on a straight-line basis over the
contractual period.

Revenues from media services are typically recognized when persuasive evidence
of a contract exists, the service has been completed and no significant
obligations of the Company remain, the fee is fixed and determinable and
collection of the resulting receivable is deemed probable. The Company records
revenue on a percentage of completion method, generally by using the number of
tapes completed as a percentage of total tapes included in the contract, when
performing services of a duration of 30 days or more and all criteria for
recognition of service revenue are met other than completion.

We perform ongoing credit evaluations of our customers' financial condition and
generally do not require collateral. We maintain allowances for potential credit
losses and such losses have been within our expectations.

Inventories

Inventory consists of the following (in thousands):

                                        March 31,    September 30,
                                          2002           2001
                                        --------------------------
Raw materials and supplies                $ 273         $   390
Work-in-process                              50             112
Finished goods                              214             616
                                        --------------------------
                                          $ 537         $ 1,118
                                        ==========================

Net Loss Per Share

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

<TABLE>
<CAPTION>
                                                        Three months ended           Six months ended
                                                              March 31,                  March 31,
                                                         2002         2001          2002          2001
                                                      ----------------------------------------------------
<S>                                                   <C>           <C>           <C>           <C>
Denominator

Denominator for basic and diluted loss per share -
  weighted average common shares                      26,760,584    22,103,804    26,213,343    22,019,690
                                                      ====================================================
</TABLE>


                                       9

<PAGE>

<TABLE>
<CAPTION>
<S>                                                <C>          <C>          <C>          <C>
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 anti-dilutive:

    Options, warrants and exchangeable shares      2,835,638    1,567,034    2,506,584    1,375,651
    Convertible subordinated debt                  1,814,058        -          907,029        -
</TABLE>


Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. FAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company adopted FAS 144 as of October 1, 2002. The adoption of the Statement had
no significant impact on the Company's financial position and results of
operations.

Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142,
goodwill is no longer amortized but reviewed for impairment annually, or more
frequently if certain indicators arise. The Company is required to complete the
initial step of a transitional impairment test within six months of adoption of
SFAS No. 142. During the first quarter of 2002 the Company retained an outside
valuation firm to assist in the completion of the transitional impairment test.
It was determined that the remaining goodwill of the media services reporting
unit associated with the acquisitions of STV and International Image was
entirely impaired, which resulted in a $44,732,000 charge reflected as a
cumulative effect of changes in accounting principle. See Note 5 for additional
details.

Subsequent impairment charges for MediaSite or other acquisitions, if any, will
be reflected as an operating expense in the income statement. Had the Company
been accounting for its goodwill under SFAS No. 142 for all periods presented,
the Company's net income and earnings per share would have been as follows:

                                       10

<PAGE>


<TABLE>
<CAPTION>


  (in thousands, except per share data)                     Six months ended March 31,
                                                            2002                  2001
                                                           -------------------------------
  <S>                                                      <C>                    <C>

  Reported net loss                                        $(50,262)              $(29,950)
  Add back cumulative effect of changes in
   accounting principle                                      44,732                     -

  Add back goodwill amortization                                 -                  14,027
                                                           --------------------------------
   Adjusted net loss                                       $ (5,530)              $(15,923)
                                                           ================================
  Basic and diluted - net loss per share
   Reported net loss per share                             $  (1.92)              $  (1.36)
   Cumulative effect of changes in accounting
    principle                                                  1.71                     -
   Goodwill amortization                                         -                     .64
                                                           --------------------------------
    Adjusted net loss per share                            $   (.21)              $   (.72)
                                                           ================================
</TABLE>

2. Restructuring Charge

As a result of rapidly changing market conditions, in December 2000 the
Company's Board of Directors authorized management to make a 40% workforce
reduction affecting all divisions of the Company in order to reduce future cash
expenditures. The restructuring charges were determined based upon plans
submitted by the Company's management and approved by the Board of Directors
using information available at the time. As a result of the workforce reduction,
the Company exited four leased facilities and disposed of fixed assets (mainly
computer equipment and trade show assets) that were no longer necessary for
future operations. Future lease obligations of facilities exited were accrued
net of estimated sub-lease income to be generated through the lease term.
Computer equipment and trade show assets no longer necessary for operations were
written down from a carrying amount of $3.1 million to their anticipated net
realizable value. As a result of the workforce reductions, termination of leases
and disposal of fixed assets, the Company recorded restructuring charges of
$3,782,000 during the first quarter of fiscal 2001. In the fourth quarter of
fiscal 2001, the Company refined the net realizable value of equipment no longer
necessary in operations that was identified in the December 2000 restructuring
plan, which resulted in an additional charge of $1,191,000. The remaining
balance will continue to decrease as lease obligations are paid and sublease
income is received.


<TABLE>
<CAPTION>


(in thousands)                                  Severance and       Lease       Fixed Asset
                                               Related Charges   Terminations    Disposals     Other     Total
                                               ---------------   ------------   -----------    -----    -------
<S>                                            <C>               <C>            <C>            <C>        <C>
Charge in December 2000                                $ 1,470         $1,555        $  594    $ 163    $ 3,782
Charge in September 2001                                   -              -           1,191       -       1,191
                                               ----------------------------------------------------------------
  Total charges                                          1,470          1,555         1,785      163      4,973
Adjustments to December 2000 charge                        -             (503)          503       -          -
Amount paid                                             (1,470)          (707)           -        (2)    (2,179)
Non-cash charges                                           -               -         (2,288)    (161)    (2,449)
                                               ----------------------------------------------------------------
  Accrued liabilities at September 30, 2001                -              345            -        -         345
</TABLE>

                                       11

<PAGE>

<TABLE>
<S>                   <C>                                      <C>                                       <C>
Amount paid in fiscal 2002                                     (238)             -           -           (238)
                                      -----------------------------------------------------------------------------
                                        $       -     $         107      $       -     $     -   $        107
                                      =============================================================================
</TABLE>


3.       Contingencies

In early January 2001, the Company withheld paying a $4 million note due to the
former shareholders of International Image pending the resolution of certain
disputed representations made during the acquisition. In January 2001 the note
holders initiated litigation against the Company in Toronto for payment of the
note and in March 2001 the Company initiated a counter action for damages
incurred. In April 2001, the Company paid certain shareholders $500,000 in full
settlement of $700,000 of the note plus accrued interest originally owed.
Litigation with the remaining shareholders is still pending. In October 2001,
pursuant to an agreement with the plaintiffs, the Company deposited $1,000,000
with the Ontario Superior Court of Justice to be held in trust until settlement
of the suit. The transaction was recorded as restricted cash.

4.       Acquisitions

On October 15, 2001, the Company completed the asset purchase of MediaSite,
Inc., a pioneer in providing automated rich media publishing, management and
access solutions. Under terms of the purchase agreement, a wholly-owned
subsidiary of the Company purchased the majority of the assets of MediaSite and
assumed certain of its liabilities in exchange for 3,880,000 shares of the
Company's common stock and 300,000 warrants valued at $1.20 per share. Also as
part of the purchase, the Company capitalized $490,000 in closing costs,
$3,101,000 in assumed liabilities and a $365,000 advance that was issued to
MediaSite in September 2001. Approximately $9,100,000 of intangible assets
resulted from the purchase. The Company obtained an independent appraisal, which
resulted in an allocation of $120,000 to the Carnegie Mellon University license
agreement, $130,000 to the MediaSite trade name and $1,400,000 to acquired
technology. All three were determined to have useful lives of 5 years and will
be amortized to cost of systems. $100,000 was amortized in the current quarter.
The remaining balance of $7,450,000 will be assigned to goodwill and, in
accordance with SFAS No. 142, will not be amortized, but will be reviewed
annually for impairment.

On February 12, 2002 the Company's media services division purchased all the
intellectual property rights to Media Taxi (TM) from Los Angeles based Digital
Savant, Inc. in exchange for $100,000 and 221,000 shares of the Company's common
stock. Media Taxi is a widely deployed browser-based media asset management
system focused on streamlining and reducing the cost of managing and
distributing marketing and publicity materials for the entertainment industry.
As part of the acquisition, $430,000 was assigned to goodwill and, in accordance
with SFAS No. 142, will not be amortized, but will be reviewed annually for
impairment. $240,000 was assigned to purchased technology and will be amortized
to cost of services over two years. $20,000 was amortized in the current
quarter.

5.       Goodwill and Other Intangible Assets - Adoption of Statement No. 142


                                       12

<PAGE>

In July 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible Assets,
which established financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, Intangible Assets.
The Company early adopted SFAS No. 142 on October 1, 2001, the beginning of its
fiscal year. SFAS No. 142 requires that goodwill and intangible assets that have
indefinite useful lives not be amortized but, instead, tested at least annually
for impairment. Accordingly, the Company reclassified the net book value of
assembled workforce to goodwill and ceased amortization of all goodwill, on
October 1, 2001. Intangible assets that have finite useful lives, primarily
developed technology and know-how, continue to be amortized over their useful
lives.

The standard also requires that goodwill be tested for impairment annually. In
the year of adoption, the standard required a transitional goodwill impairment
evaluation, which was a two-step process. The first step was a screen for
whether there was an indication that goodwill was impaired as of October 1,
2001. At this time, the Company had two reporting units - software and media
services. The entire goodwill balance, which had resulted from the 2000
acquisitions of STV Communications and International Image, related to the media
services unit. To determine if the goodwill was impaired, the company retained
an independent appraisal firm to a perform a valuation of the media services
unit using the criteria prescribed under FAS 142. As of December 2001, the
appraisers completed this first step, which indicated that goodwill recorded
during the 2000 acquisitions mentioned above was impaired as of October 1, 2001.

For the second step, the Company used the services of the same independent
appraisal firm to compare the implied fair value of the affected reporting
unit's goodwill to its carrying value in order to measure the amount of
impairment. The fair value of goodwill was determined by allocating the
reporting unit's fair value to all of its assets and liabilities in a manner
similar to a purchase price allocation in accordance with SFAS No. 141 Business
Combinations. As of December 2001, the appraisers concluded that goodwill was
100% impaired. Therefore, the Company recorded an impairment loss of $44.7
million as a cumulative effect of a change in accounting principle in its
statement of operations.

The circumstances leading to the goodwill impairment related to: 1) the
decreased demand for digital services such as encoding (especially from dot
coms); 2) significant reductions of STV's workforce; 3) the company's decreased
market capitalization; and 4) a history of cash flow and operating losses for
the media services unit. These negative trends provide evidence that initial
growth expectations when STV and International Image were acquired have not
materialized. The fair value used to determine the impairment was based on a
combination of discounted cash flow valuation techniques, market transactions
and the prices of publicly-traded comparable companies.

6.       Convertible Subordinated Debt

In January and February 2002, the Company completed a $7,125,000 offering of
convertible subordinated debt with several investors. The promissory notes bear
interest at 10% per annum and mature (if not converted) in monthly installments
commencing on December 1, 2002, in the event we raise at least $8,000,000 in
additional financing on or before July 1, 2002 on terms


                                       13

<PAGE>

specified in the notes. In such case, the aggregate amount of such monthly
installments for all the Notes is $330,000 with a final installment in the
aggregate amount of $2,502,000 due on the maturity date of February 1, 2004. If
we do not complete such financing of at least $8,000,000 on or before July 1,
2002 and otherwise meet the requirements in the Notes, the Notes mature (if not
converted) in monthly installments commencing on August 1, 2002. In such case
the aggregate amount of such monthly installments for all the Notes is $330,000
with a final installment in the aggregate amount of $1,181,000 due on the
maturity date of February 1, 2004.

The Notes may be converted into shares of our common stock, in whole or in part,
at any time. The conversion price is $2.45 per share, subject, to potential
anti-dilution adjustments. The Investors also received 1,163,000 warrants to
purchase shares of common stock at an exercise price of $2.94.

The Company also paid a $502,500 commission and issued 129,000 warrants to
purchase common stock at an exercise price of $2.94 to the placement agents,
which are classified as debt issuance costs in the accompanying balance sheet.
Warrants granted to the Investors and the placement agents expire in February
2006.

The value allocated to the warrants issued was measured at the date of grant
because the number of shares was fixed and determinable. The value was
determined based upon a Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 3%, dividend yield of 0%, expected
common stock market price volatility factor of 1.5 and the expected life of the
warrants. The valuation of the investor warrants reduced the carrying value of
the debt by $2.8 million and was recorded as a debt discount. The debt discount
recorded for the warrant valuation caused a beneficial embedded conversion
feature valued at $3.5 million and was recorded as an additional debt discount.

The debt discount is being amortized using an effective interest method over the
two-year term of the debt. The unamortized balance of the debt discount at March
31, 2002, was $5,543,000. The debt issuance costs are being amortized using the
straight line method over the two-year term of the debt.

Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion of the consolidated financial position and results of
operations of the Company should be read in conjunction with the consolidated
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, 2001. 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 our products, market introduction or

                                       14

<PAGE>

product development delays, our ability to effectively integrate acquired
businesses, global and local business conditions, legislation and governmental
regulations, competition, our ability to effectively maintain and update our
product portfolio, shifts in technology, political or economic instability in
local markets, and currency and exchange rate fluctuations.

Overview

In accordance with FAS 131 disclosure on segment reporting, the SEC's guidance
has been to present financial information in a format that is used by the
Company's management to make decisions. The Company is a leading provider of
professional rich media solutions with three primary revenue centers:

Sonic Foundry Media Software develops sophisticated software tools used by
professionals and hobbyists for the creation, editing and publishing of digital
audio and video. We currently focus our software efforts on the Sound Forge(R),
ACID(TM) and Vegas(R) Video platforms.

Sonic Foundry Media other video Services supplies media digitization, management
and delivery solutions for various industries, particularly the entertainment
sector. These services consist of conversion, reformatting and encoding of
television, film and other video content for multiple delivery platforms.

Sonic Foundry Media Systems (formerly MediaSite) develops automated rich-media
applications and scalable solutions that allow media owners - including
entertainment companies, corporations and government organizations - to deploy,
manage and distribute video content on IP-based networks.

These three revenue centers, along with their respective production costs, are
analyzed independently from each other. However, because the majority of
operating expenses support all revenue centers, all items below gross margin are
analyzed on a combined basis.

Critical Accounting Policies

We have identified the following as critical accounting policies to our company
and have discussed the development, selection of estimates and the disclosure
regarding them with the audit committee of the board of directors:

     . Revenue recognition, sales returns, allowance for doubtful accounts and
       other credits;

     . Impairment of investments and

     . Impairment of long-lived assets

                                       15

<PAGE>

Revenue Recognition, Sales Returns, Price Protection and Rebates

We recognize revenue for licensing of software products upon shipment, net of
estimated returns, provided that collection is determined to be probable and no
significant obligations remain. Product revenue from distributors is subject to
agreements allowing limited rights of return, rebates, and price protection.
Accordingly, we reduce revenue recognized for estimated future returns, price
protection when given, and rebates at the time the related revenue is recorded
or promotion is offered. The estimates for returns are adjusted periodically
based upon historical rates of returns, inventory levels in the distribution
channel, and other related factors. The estimates and reserves for rebates and
price protection are based on historical rates. While management believes it can
make reliable estimates for these matters, nevertheless unsold products in these
distribution channels are exposed to rapid changes in consumer preferences or
technological obsolescence due to new operating environments, product updates or
competing products. Significant judgments and estimates must be made and used in
connection with establishing reserves for sales returns, price protection and
rebates in any accounting period. Material differences may result in the amount
and timing of our revenue for any period if we made different judgments or
utilized different estimates. During fiscal 2001, returns from software products
sold to consumer retail distributors were higher than historical rates incurred
in fiscal 2000 and 1999. In response to economic factors affecting the consumer
retail market, we began recording revenues to consumer retail distributors on a
consignment basis in September 2001.

Please refer to Note 1 of our Notes to Consolidated Financial Statements for
further information on our revenue recognition policies.

The preparation of our consolidated financial statements also requires us to
make estimates regarding the collectability of our accounts receivables. We
specifically analyze the age of accounts receivable and analyze historical bad
debts, customer concentrations, customer credit-worthiness and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts.

Impairment of Investments

We periodically evaluate whether any estimated decline in the fair value of our
long-term investment is other-than-temporary. Significant judgments and
estimates must be made to assess the fair value of our investment and determine
whether an other-than-temporary decline in fair value of our investment has
occurred. This evaluation consists of a review of qualitative and quantitative
factors, review of publicly available information regarding the investee and
discussions with investee management. Since our investment is in a private
company with no quoted market price, we also consider the implied value from any
recent rounds of financing completed. Based upon an evaluation of the facts and
circumstances during the quarter ended March 31, 2002, we determined that no
other-than-temporary decline in fair value of our investment had occurred.

                                       16

<PAGE>

Impairment of long-lived assets

We assess the impairment of goodwill on an annual basis or whenever events or
changes in circumstances indicate that the fair value of the reporting unit to
which goodwill relates is less than the carrying value. Factors we consider
important which could trigger an impairment review include the following:

..  poor economic performance relative to expected historical or projected future
   operating results;

..  significant negative industry, economic or company specific trends;

..  changes in the manner of our use of the assets or the plans for our business;
   and

..  loss of key personnel

If we determine that the fair value of a reporting unit is less than its
carrying value including goodwill, based upon the annual test or the existence
of one or more of the above indicators of impairment, we would then measure
impairment based on a comparison of the implied fair value of reporting unit
goodwill with the carrying amount of goodwill. The implied fair value of
goodwill is determined by allocating the fair value of a reporting unit to its
assets (recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation. The residual fair value after this allocation is the
implied fair value of reporting unit goodwill. To the extent the carrying amount
of reporting unit goodwill is greater than the implied fair value of reporting
unit goodwill, we would record an impairment charge for the difference.

The Company evaluates all of its long-lived assets, including intangible assets
other than goodwill, for impairment in accordance with the provisions of SFAS
No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS 121 requires that long-lived assets and
intangible assets other than goodwill be evaluated for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable based on expected undiscounted cash flows attributable to
that asset. Should events indicate that any of the Company's assets are
impaired; the amount of such impairment will be measured as the difference
between the carrying value and the fair value of the impaired asset and recorded
in earnings during the period of such impairment.

We Disclose Pro Forma Financial Information

We release quarterly unaudited financial statements prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). We also
disclose and discuss certain pro forma financial information in the related
earnings release and investor conference call. Our pro forma financial
information does not include amortization of purchased technology, restructuring
charges, amortization of goodwill or other purchased intangibles, non-cash
interest expense, or cumulative effect of changes in accounting principle.

We believe the disclosure of the pro forma financial information helps investors
more meaningfully evaluate the results of our ongoing operations. However, we
urge investors to carefully review the GAAP financial information included as
part of our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K, and
our quarterly earnings releases and compare that GAAP financial information with
the pro forma financial results disclosed in our quarterly earnings releases and
investor calls, as well as in some of our reports.

                                       17

<PAGE>

The following table shows the Company's pro forma results reconciled to the GAAP
Consolidated Statements of Income table.


                                              Sonic Foundry, Inc
                                              Pro Forma Analysis

<TABLE>
<CAPTION>

(In 000's, except per share data)               Three months ended                  Six months ended
                                                     March 31,                          March 31,
                                               2002              2001            2002              2001
                                              ---------------------------------------------------------
<S>                                           <C>               <C>            <C>             <C>
Net loss                                      $(2,912)          $(10,277)      $(50,262)       $(29,950)
Amortization of purchased technology              120                  -            120               -
Amortization of goodwill and other
  intangibles                                       -              7,009              -          14,027
Restructuring charges                               -                  -              -           3,782
Non-cash interest expense                         858                  -            858               -
Cumulative effect of changes in
  accounting principle                              -                  -         44,732               -
                                              ---------------------------------------------------------
Pro forma net loss                             (1,934)            (3,268)        (4,552)        (12,141)
                                              ---------------------------------------------------------

Pro forma net loss per common share -
  basic and diluted                           $  (.07)          $  (0.15)      $   (.17)       $  (.55)
                                              --------------------------------------------------------
Shares used in computing basic and
  diluted net loss per share (in
  thousands)                                   26,761             22,104         26,213         22,020
                                              --------------------------------------------------------
</TABLE>


Results of Operations

The following chart has been presented to add clarification only and should be
read in conjunction with the consolidated financial statements.

<TABLE>
<CAPTION>
                                            Three months ended March 31,             Six months ended March 31,
                                              2002                2001               2002                2001
                                            -----------------------------------------------------------------------
<S>                                       <C>        <C>      <C>         <C>   <C>        <C>        <C>       <C>
Software license fees                     $3,608     100%     $4,534      100%  $ 7,161    100%       $8,522    100%

Cost of software license fees                846      23       1,790       39     1,809     25         3,194     37
                                          -------------------------------------------------------------------------
Gross margin-software license fees        $2,762      77%     $2,744       61%  $ 5,352     75%       $5,328     63%

Media services                            $2,438     100%     $2,730      100%  $ 4,785    100%       $5,260    100%
Cost of media services                     1,798      74       1,957       72     3,575     75         4,290     82
                                          -------------------------------------------------------------------------
 Gross margin-media services              $  640      26%     $  773       28%  $ 1,210     25%       $  970     18%
</TABLE>



                                       18

<PAGE>

<TABLE>
<S>                                 <C>            <C>         <C>       <C>   <C>  <C>    <C>       <C>     <C>
Media systems                       $       405    100%         -         -    $    543    100%       -       -
Cost of media systems                       123     30          -         -         159     29        -       -
                                    -----------------------------------------------------------------------------
 Gross margin-media systems         $       282     70%         -         -    $    384     71%       -       -
</TABLE>

Revenue from Software License Fees

Revenues from software license fees consist of fees charged for the licensing of
Windows based software products. The Company's primary focus is on the platforms
of ACID(TM), Sound Forge(R) and Vegas(R) Video. These software products are
marketed to both consumers and producers of digital media. We reach both our
domestic and international markets through traditional retail distribution
channels, our direct sales effort and OEM partnerships.

     Q2-2002 compared to Q2-2001 and YTD-2002 (six months) compared to YTD-2001
(six months)

Net revenues from software license fees decreased $926 or 20% from Q2-2001 to
Q2-2002 and $1,361 or 16% from YTD-2001 to YTD-2002. The net changes resulted
from the following items:

     .    $1.3 million of the quarter to quarter decline resulted from sales of
          Sound Forge. In Q2-2001, the first major update of Sound Forge
          in several years, version 5.0, generated nearly $2 million in revenue.
          In Q2-2002, as sales declined pending release of Sound Forge 6.0, the
          product sold just over $700. We anticipate Sound Forge sales will
          again approach the Q2-2001 levels after we release version 6.0 in May
          2002.

     .    $300 of the quarter to quarter decline related to ACID and Acid
          Loops. Q2-2001 saw strong performance as a number of new loop bundles
          were sold in the retail channel. Although loop sales remain strong in
          the direct channel due to strong catalog sales, they have not
          approached the retail levels reached during Q2-2001.

     .    The quarter to quarter declines above were offset by the growth of
          Vegas Video. In November 2001, we released version 3.0 of this
          product and generated nearly $600 of sales growth from the prior year
          quarter.

     .    The remainder of the quarter to quarter decline can be attributed to a
          Q2-2001 increase in our reserve for product returns due to poor sell
          through of certain lower end retail products like Siren and ACID
          Latin. These products have been discontinued as we shifted our focus
          to the professional platforms of ACID, Sound Forge and Vegas Video.

     .    The YTD trends mirror those of the quarter. Sound Forge YTD declines
          amounted to $1.2 million, Acid and Acid Loops declined by $760, and
          Vegas Video grew by over $1 million. Increases in YTD-2001 reserves
          for product returns account for most of the remaining change.

Gross Margin from Software License Fees

Included in costs of software license fees are product material costs, assembly
labor, freight, royalties on third party technology or intellectual content, and
amortization of previously capitalized product development and localization
costs. Despite the decline in software


                                       19

<PAGE>

revenues, 2002 software gross margin dollars were nearly identical with Q2-2001
and YTD-2001 amounts. The much improved margins on a percentage basis can be
attributed to the declining presence of lower priced consumer retail products
and a shift toward higher priced professional products. In 2001, the poor
performance of the lower priced retail products, which had margins near 50%,
negatively impacted gross margin. We anticipate that software margins will
continue to approach 80% as we expand our direct channel and electronic download
business.

Revenue from Media Services

Revenue from media services includes tape duplication for broadcast
distribution, broadcast standard conversions, audio and video encoding, as well
as fees for consulting services. Since our restructuring in December 2000,
revenue from low bit rate encoding has generated less than 2% of media services
and has been deemphasized.

Revenue from media services declined $292 or 11%, from Q2-2001 to Q2 2002. A
decline in advertising income of entertainment companies led to decreased demand
(over $400) for our traditional duplication and conversion services. This
decline was offset by growth in our digital restoration and High Definition
services ($100) and revenues from consulting and the MediaTaxi technology,
acquired from Digital Savant in February 2002, (over $80) during Q2-2002.

Revenue from media services declined $475, or 9%, from YTD-2001 to YTD-2002.
Reasons for the change mirror those in the quarter discussion above. Traditional
services declined approximately $800 while Digital Restoration and High
Definition services rose by nearly $250. A decrease in audio encoding revenues
of approximately $100 also contributed to the overall decline.

Gross Margin from Media Services

Costs of media services include compensation, benefits and other expenses
associated with production personnel, videotape costs, depreciation on
production equipment and an allocation for general and administrative expenses
such as facility costs. These costs have become relatively stable and fixed in
dollars since Q3-2001 and we anticipate no major increases in the near future.
Future fluctuations in gross margin will result primarily from changes in
revenue because: 1) these costs should remain relatively fixed going forward;
and 2) newer offerings, such as MediaTaxi and MediaDub, are lower cost
procedures.

Gross Margin from media services declined from 28% to 26% from Q2-2001 to
Q2-2002. Revenues from services declined $300, while cost of services only
declined $200. The decline in cost of services was related to $300 savings from
reductions in production personnel, which was offset by an increase in
depreciation of $100. Q2-2002 included $20 of amortization of MediaTaxi
technology acquired in February. The MediaTaxi technology will be amortized at
$10 per month for the next two years.

Gross margin from media services improved from 18% to 25% from YTD-2001 to
YTD-2002. Revenues from services declined $500, while cost of services declined
$700. The decline in cost of services is related to the Company's restructuring
that occurred in Q1-2001, which included

                                       20

<PAGE>

the elimination of duplicate positions, operational and process improvements, a
switch to a temporary labor force for encoding services and a reduction in
depreciation expenses from the write-off and disposal of underutilized assets no
longer needed for the service business.

Revenue from Media Systems

The media systems business, established upon acquisition of MediaSite, recorded
Q2-2002 revenues of $405 - an increase of $267 over its initial quarter
(Q1-2002). Approximately half of the system revenues represent what we believe
to be the first stage of a relationship with a unit of the Federal Government,
from which we expect to generate additional license and support revenues in the
future. In total, government contracts accounted for 75% of total media system
sales.

Gross Margin from Media Systems

Gross margin from media systems consists of a 5% royalty on certain sales of
MediaSite technology and amortization of MediaSite acquisition amounts assigned
to purchased technology and other identified intangibles. During the year and
quarter, all Systems revenue were subject to the royalty. We will be amortizing
approximately $100 per quarter over the next 5 years for the identified
intangibles of the MediaSite purchase.

In the future, our systems group intends to market systems that include a
hardware component with gross margins just over 50%. Although such units are not
currently expected to exceed 10% of systems sales, they may reduce future gross
margin percentages of media systems.

Operating Expenses

The following chart is provided to add clarification by presenting items as a
percentage of total revenues. For comparison purposes, amortization of goodwill
has been excluded from the 2001 results due to the adoption of SFAS No. 142.
Please see Note 1 of the financial statements for further details. This should
be read in conjunction with the unaudited consolidated financial statements
presented in this filing.

                                        Three months ended     Six months ended
                                             March 31,             March 31,
                                        2002          2001     2002        2001
                                        ---------------------------------------
Total revenues                          100%          100%     100%        100%
Cost of revenues                         43            52       44          54
                                        ---------------------------------------
  Gross margin                           57            48       56          46

Operating expenses

  Selling and marketing expenses         29            38       35          58
  General and administrative expenses    26            30       26          43
  Product development expenses           28            25       29          34
  Restructuring charges                   -             -        -          27
                                        ---------------------------------------
    Total operating expenses             83            93       90         162
                                        ---------------------------------------
    Loss from operations                (26)%         (45)%    (34)%      (116)%
                                        =======================================

                                       21

<PAGE>

Selling and Marketing Expenses

Selling and marketing expenses include wages and commissions for sales,
marketing, business development and technical support personnel, our direct mail
catalog, co-operative advertising with our software distributors, print
advertising and various promotional expenses for our products, services and
systems. Timing of these costs may vary greatly depending on introduction of new
offerings and entrance into new markets.

Q2-2002 compared to Q2-2001 and YTD-2002 (six months) compared to YTD-2001
(six months)

Selling and marketing expenses declined both as a percentage of revenues and in
gross dollars for the quarter period. The decline from Q2-2001 to Q2-2002 was
$856 or 31%. Two primary contributors to the decline were reductions in
co-operative advertising and customer service. The reduction in co-operative and
other advertising of over $700 reflects our shift away from lower priced
consumer retail products which demanded heavier in-store promotions. Our
customer service expenses declined by $200 because: 1) we terminated outsourcing
arrangements that provided 24 hour support; and 2) we reduced headcount in our
internal customer service department which no longer had to support discontinued
lower priced, higher volume retail products. The above items, and other smaller
reductions related to advertising and catalogs, were slightly offset by
increases in media systems sales and marketing personnel.

The YTD decline of $3,683 or 46% in selling and marketing resulted from: 1)
reduction in advertising and co-op advertising in the retail channel ($1.6
million of the change); 2) significant staff reductions as part of the December
2000 restructuring (over $1 million of the change); and 3) decline in tradeshow
expenses ($360 of the change).

We anticipate that the continued promotion of our new systems offerings and the
upcoming updates of Sound Forge and Acid will lead to increases in selling and
marketing expenses for the remaining fiscal year. We expect Q3-2002 and Q4-2002
levels to be near the Q1-2002 total of $2.4 million.

General and Administrative Expenses

General and administrative ("G&A") expenses consist of personnel and related
costs associated with the facilities, finance, legal, human resource and
information technology departments, as well as other expenses not fully
allocated to functional areas.

Q2-2002 compared to Q2-2001 and YTD-2002 (six months) compared to YTD-2001
(six months)

G&A expenses declined by $525 or 24%, from Q2-2001 to Q2-2002. The decline is
primarily the result of: 1) a reduction in bad debt expense from $300 to $100
which reflects large 2001 write-offs related to audio encoding services to dot
coms; 2) approximately $150 of reductions in headcount due in part to reduced
purchasing and operational support needs; and 3) a salary waiver program for
executives that began in December 2001 ($125,000 of change). Under the terms of
the salary waiver program, certain executives waived salary in exchange for
stock

                                       22

<PAGE>

options. The addition of MediaSite's Pittsburgh facility, which primarily houses
sales and marketing and product development staff, had minimal impact on G&A
expenses.

The YTD reduction of $2,608 or 44% is due to the elimination of non-recurring,
integration related expenses and elements of the Q1-2001 restructuring plan
which included the removal of duplicate personnel functions and the
consolidation of facilities. In addition, bad debt expense decreased by $400 for
the six-month periods.

For the remainder of fiscal 2002, we anticipate G&A expenses will remain
constant. We feel we have adequate resources and infrastructure to support
anticipated near term growth.

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. Fluctuations in product development expenses correlate directly to
changes in headcount.

Q2-2002 compared to Q2-2001 and YTD-2002 (six months) compared to YTD-2001
(six months)

Product development expenses increased $22 or 1% from Q2-2001 to Q2-2002. Head
count increased from 61 to 65 as the addition of the MediaSite staff slightly
exceeded other attrition.

Product development costs declined $965 or 21% from YTD-2001 to YTD-2002. The
decrease resulted from the company-wide restructuring that occurred at the end
of Q1-2001. Headcount at the beginning of that quarter was just over 100. As
part of the restructuring, we eliminated low volume, niche products such as CD
Architect(TM) and Soft Encode as well as the engineering positions required to
maintain these products.

In accordance with SFAS Number 86, the Company capitalizes the cost of
development of software products that have reached technological feasibility and
then amortizes that cost over the anticipated life of the product. No
development costs for our core product line were capitalized during fiscal 2001
or the first two quarters of 2002. Amortization of capitalized software
development was $55 in Q1-2002 and relates to Viscosity(TM), which was a result
of the Jedor acquisition in February 2000. Viscosity was fully amortized in
January 2002.

Product development spending increased slightly over the quarter ended September
2001 due to the recent acquisition of MediaSite software developers. Going
forward we anticipate spending for research and development to remain relatively
stable and we do not anticipate that any fiscal 2002 software development
efforts will qualify for capitalization under SFAS Number 86.

Restructuring Charges

As outlined in footnote 2 to the unaudited consolidated financial statements
included in this report, a restructuring charge of $3,782 was incurred in
Q1-2001. Consistent with management's plan to reduce costs in response to weak
market conditions, the restructuring charge primarily consisted of: 1) an
accrual for 60 days of severance and benefits for domestic employees terminated
on December 20, 2000 as well as severance and other expenses associated with

                                       23

<PAGE>

closing our office in the Netherlands; 2) an asset impairment charge related to
the sale, disposal or write-down of PCs, office equipment and other assets no
longer required; 3) operating and lease termination costs related to the
consolidation of facilities; and 4) miscellaneous charges such as forfeited
tradeshow deposits.

Other Income (Expense)

The increase in interest expense was due to the subordinated debt issuance in
February 2002. This debt resulted in $858 (approximately 2 months) of non-cash
amortization. (see note 6 to the consolidated financial statements). In
addition, other expense included a $219 loss on asset disposals during the
current YTD period.

The amortization of the debt discount and debt issuance costs will approximate
$1.5 million per quarter through the remainder of fiscal 2002. If some of the
debt is converted, the unamortized debt issuance and discount amounts would be
reclassified to equity.

Cumulative Effect of Changes in Accounting Principle

Effective October 2001, the Company adopted Financial Accounting Standards Board
("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under the new rules,
the Company ceased the amortization of goodwill associated with the media
services reporting unit, which included the acquisitions of STV Communications
and International Image. Implementation of the new rules also requires an
assessment of the carrying value of goodwill using a number of criteria,
including the value of the overall enterprise as of October 1, 2001. The Company
retained an independent appraisal firm to assist in the assessment, which
resulted in a $44,732 write off of the entire remaining value of goodwill
associated with the media services reporting unit. Future impairment charges, if
any, associated with MediaSite or other acquisitions will be reflected as an
operating expense in the statement of operations.

Liquidity and Capital Resources

Cash used in operating activities was $3,933 YTD-2002 compared to $9,598 in
YTD-2001. The decrease of $5,665 consisted primarily of operating cost
reductions identified in the Q1-2001 restructuring. The primary reason for the
change was the net change in loss from operations before amortization of
goodwill and restructuring charges, which improved from $12,187 in YTD-2001 to
$4,283 in YTD-2002. This improvement was offset by payments of liabilities
assumed in the MediaSite acquisition ($2.1 million).

Cash used in investing activities was $837 in YTD-2002 compared to $1,197 in
YTD-2001. A $1.5 million decline in the purchase of equipment offset by cash
from sale of a building in YTD-2001 led to the difference between the two
periods. The reduction in purchases relate to our restructuring and previous
build up of certain services business lines such as encoding and webcasting. The
Investing activities in the current year also included legal, professional and
other closing costs associated with the MediaSite acquisition while the prior
year included certain payments related to the International Image acquisition.

                                       24

<PAGE>

Cash provided by financing activities was $5,103 in YTD-2002 compared to cash
used of $826 in YTD-2001. The primary change was due to additional subordinated
debt, which resulted in $6,686 of net proceeds. In October 2001, we deposited
$1,000 with the Ontario Superior Court of Justice to be held in trust until
settlement of a lawsuit with the former shareholders of International Image.
This $1,000 has been recorded as restricted cash. Payments on other debt and
capital leases decreased $750 due to the early 2001 sale of a building, and
corresponding mortgage retirement.

Recent Developments Impacting Liquidity

In May 2002 we made the first quarterly interest payment of $175 on the
subordinated debt. Payments are due quarterly over the next two years. Monthly
principal payments of approximately $330 begin in August 2002 unless we raise at
least $8 million of additional capital by July 1, 2002, in which case the
principal payments of approximately $330 will begin December 1, 2002 or, some or
all of the debt converts into equity, in which case the interest and principal
amounts would be decreased accordingly.

The 6 month period included cash expenditures for non-recurring items such as
MediaSite acquisition costs, large settlement payments on the delinquent
accounts payable assumed from MediaSite and cash placed in escrow. The Company
believes it has access to sufficient resources and operating flexibility to fund
operations and subordinated debt payments for at least the next twelve months.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments

The Company is not party to any derivative financial instruments or other
financial instruments for which the fair value disclosure would be required
under SFAS No. 107, Derivative Financial Instruments, Other Financial
Instruments and Derivative Commodity Instruments. The Company's cash equivalents
consist of overnight investments in money market funds that are carried at fair
value. Accordingly, we believe that the market risk of such investments is
minimal.

Interest Rate Risk

The Company's cash equivalents are subject to interest rate fluctuations,
however, we believe this risk is immaterial due to the short-term nature of
these investments.

Foreign Currency Exchange Rate Risk

All international sales of our software products are denominated in US dollars.
However, the majority of transactions for our media services division in Toronto
are denominated in Canadian dollars. Although these transactions are not
generally subject to significant foreign exchange rate gains and losses, they
are translated into US dollars as part of our consolidated financial

                                       25

<PAGE>

statements and therefore fluctuations in the exchange rate will affect our
consolidated financial statements. The Canadian dollar has been stable relative
to the US dollar and we have not engaged in any foreign currency hedging
activities.

                                       26

<PAGE>

PART II  OTHER INFORMATION

Item 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None

(b) None

(c) Between January 1, 2002 and March 31, 2002 the Company issued unregistered
    securities as follows:

In February 2002, we issued 221,000 shares to Digital Savant, Inc., as part of
the Media Taxi asset purchase.

In January and February 2002, we closed on a $7,125,000 offering of convertible
subordinated debt (the "Note Offering") with several investors (the
"Investors"). The promissory notes issued (the "Notes") bear interest at 10% per
annum and are due February 1, 2004 (if not converted).

The Notes may be converted into shares of our common stock, in whole or in part,
at any time. The conversion price is $2.45 per share, subject, however, to
adjustment. The conversion price will be adjusted in the following
circumstances: (a) in the event we declare a stock dividend or stock split or
combine our shares of common stock; or (b) in the event we issue 500,000 or more
shares (the "New Shares") at a price per share that is lower than both $2.00 per
share and the Investors' then current conversion price (the lower of the two,
the "Base Price"), in which case the Investors' conversion price will be reduced
to a price equal to the Base Price less 50% of the difference between the Base
Price and the price per share at which the New Shares are issued.

No adjustment is made to the Investors' conversion price for pro-rata issuances
to all holders of our common stock, pursuant to the warrants discussed below, or
pursuant to our stock option plans.

The Investors also received warrants (the "Warrants") to purchase shares of
common stock at a strike price of $2.94.

In February, we issued 105,485 shares to Carnegie Mellon University ("CMU"). The
Shares issued to CMU relate to an obligation the Company assumed, as part of the
MediaSite transaction, for past due royalties owed by MediaSite.

The issuances to Digital Savant, CMU and the Investors 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. In that no
public offering was involved, we reasonably believed the Digital Savant, CMU and
the Investors were accredited and sophisticated investors; and that Digital
Savant, CMU and the Investors had substantial information on the Company
necessary to make an informed investment decision. On February 25, 2002, we
filed an S-3,

                                       27

<PAGE>

amended on April 29, 2002 to register the shares of our common stock underlying
the Notes and Warrants, along with an additional 25% of the total shares
issuable upon conversion of the Notes at the current conversion price, 115,000
shares to become issuable upon exercise of certain other warrants, and 105,485
Shares that were issued to CMU.

The following table sets forth certain information as of May 5, 2002 with
respect to the Investors.
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
    INVESTORS IN THE OFFERING              AGGREGATE             WARRANTS TO
                                           PRINCIPAL         PURCHASE NUMBER OF
                                           AMOUNT OF           SHARES SET FORTH
                                             NOTE                  BELOW
--------------------------------------------------------------------------------
<S>                                       <C>                <C>

              Omicron Partners, L.P.       $400,000                     653,061

--------------------------------------------------------------------------------
         Deephaven Private Placement
                       Trading, Ltd.       $800,000                     122,460

--------------------------------------------------------------------------------
           Gryphon Master Fund, L.P.       $800,000                     122,460

--------------------------------------------------------------------------------
             Quantico Partners, L.P.       $375,000                      61,225

--------------------------------------------------------------------------------
              Langley Partners, L.P.       $375,000                      61,225

--------------------------------------------------------------------------------
           OTATO Limited Partnership       $500,000                      81,650

--------------------------------------------------------------------------------
          AIG DKR Soundshore Private
                   Investors Holding       $250,000                      40,800
                           Fund LTD.

--------------------------------------------------------------------------------
                          John Feith       $100,000                      16,327

--------------------------------------------------------------------------------
                   Herber H. Hertner        $25,000                       4,082

--------------------------------------------------------------------------------
</TABLE>







                                       28

<PAGE>

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

The Annual Meeting of Stockholders was held on May 9, 2002. A quorum consisting
of approximately 90% of the Company's common stock issued and outstanding was
represented either in person or by proxy. At the meeting the following proposals
were approved by the stockholders:

   1.  To re-elect Rimas Buinevicius as a Class IV Director for a term of
       five years. Frederick H. Kopko, Jr,  Monty Schmidt, Curtis Palmer, Arnold
       Pollard and David Kleinman continued as directors following the meeting.

   2.  To ratify the appointment of Ernst & Young LLP as independent auditors of
       Sonic Foundry for the year ending September 30, 2002.

                       For           Against        Abstain/Withheld
                       ---           -------        ----------------

Proposal #1         24,319,382           -               62,068
Proposal #2         24,300,911        11,238              7,233


Item 5.  OTHER INFORMATION

Effective February 12, 2002, Sonic Foundry Media Systems, Inc. ("SFMS"), a
Maryland corporation and a wholly-owned subsidiary of the Company purchased
substantially all of the assets and assumed certain liabilities of Digital
Savant, Inc. ("Digital") pursuant to an Asset Purchase Agreement (the "Purchase
Agreement") dated February 6, 2002 by and among SFMS, the Company, and Digital.
The acquisition does not constitute a "significant" amount of assets.

Pursuant to the Purchase Agreement, the following consideration was paid: (a)
221,000 shares of the Company's common stock; (b) $100,000 in cash; and (c)
assumption of certain scheduled liabilities of Digital. Of the shares issued,
50% of the shares are restricted from sale for 6 months after closing, 25% are
restricted from sale for 12 months after closing and the remaining 25% are
restricted from sale for 18 months after closing.

The Company has agreed to register for resale under the Securities Act of 1933,
as amended, the shares of its common stock issued in the acquisition. The
registration will apply to the resale of the shares by the shareholders of
Digital, though as noted above Digital has agreed to additional resale
restrictions pursuant to a Stock Restriction and Registration Agreement. The
Company plans to file the registration statement within 120 days after the
Closing Date.

The acquisition has been accounted for as a purchase. Results of operations for
Digital have been included in the Company's consolidated operating results
beginning March 1, 2002.

In March, 2002, the Company executed a Software License and Marketing Agreement
with Broderbund Properties, LLC. (the "SLMA"). Pursuant to the SLMA, Broderbund
has agreed to distribute, on a non-exclusive basis, certain of the Company's
consumer level products through the OEM channel and a limited-exclusive right to
distribute the Company's Super Duper Music

                                       29

<PAGE>

Looper(TM) product in the retail channel. The Company may still distribute Super
Duper Music Looper into the k-12 educational channel and on a direct basis (i.e.
website, catalog, email). Under the SLMA, Broderbund must pay the Company
royalties on units sold, including certain minimum royalty levels.

                                       30

<PAGE>

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits (see exhibit list)

(b)  Reports on Form 8-K

     On January 31, 2002 and February 15, 2002, the Company filed reports on
     Item 5 of Form 8-K reporting on the closing of the $7,125,000 Note
     Offering.

ITEM 6(a)

NUMBER                              DESCRIPTION
------    ----------------------------------------------------------------------


2.1       Amendment No. 1 to the Purchase Agreement dated February 11, 2002 by
          and between Sonic Foundry, Inc. and Omicron Partners, L.P.

2.2       Note - Exhibit A to Amendment No. 1 to the Purchase Agreement.

2.3       Warrant - Exhibit B to Amendment No. 1 to the Purchase Agreement.

2.4       Registration Rights Agreement - Exhibit C to Amendment No. 1 to the
          Purchase Agreement.

3.1       Amended and Restated Articles of Incorporation of the Registrant,
          filed as Exhibit No. 3.1 to the registration statement on amendment
          No. 2 to Form SB-2 dated April 3, 1998 (Reg. No. 333-46005) (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.

10.1      Registrant's 1995 Stock Option Plan, as amended, filed as Exhibit
          No. 4.1 to the Registration Statement on Form S-8 on September 8,
          2000, 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      Employment Agreement between Registrant and Rimas Buinevicius dated as
          of January 1, 2001, filed as Exhibit 10.4 to the Quarterly Report on
          Form 10-Q for the quarter ended March 31, 2001, and hereby
          incorporated by reference.

10.4      Employment Agreement between Registrant and Monty R. Schmidt dated as
          of January 1, 2001, filed as Exhibit 10.5 to the Quarterly Report on
          Form 10-Q for the quarter ended March 31, 2001, and hereby
          incorporated by reference.

                                       31

<PAGE>

10.5      Employment Agreement between Registrant and Curtis J. Palmer dated as
          of January 1, 2001, filed as Exhibit 10.6 to the Quarterly Report on
          Form 10-Q for the quarter ended March 31, 2001, and hereby
          incorporated by reference.

10.6      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.

10.7      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.

10.9      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.

10.10     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.

10.11     Commercial Lease between Registrant and Hargol Management Limited
          regarding 23 Prince Andrew Place, Don Mills, Ontario, Canada dated
          January 15, 1990, filed as Exhibit No. 10.20 to the Amended Annual
          Report on Form 10-K/A for the year ended September 30, 2000, and
          hereby incorporated by reference.

10.12     Commercial Lease between Registrant and the Richlar Partnership
          regarding 1703 Stewart St., Santa Monica, CA, dated August 10, 1995,
          filed as Exhibit No. 10.21 to the Amended Annual Report on Form 10-K/A
          for the year ended September 30, 2000, and hereby incorporated by
          reference.

10.13     Commercial Lease between Registrant and Thomas Seaman regarding
          12233 Olympic Blvd., Santa Monica, CA, dated January 23, 2000 filed as
          Exhibit No. 10.22 to the Amended Annual Report on Form 10-K/A for the
          year ended September 30, 2000, and hereby incorporated by reference.

10.14     Agreement and Plan of Merger, dated as of March 15, 2000, by and among
          the Registrant, New Sonic, Inc., and STV Communications, Inc., filed
          as Exhibit 2.1 to a Current Report on Form 8-K dated April 18, 2000
          and hereby incorporated by reference.

10.15     Stock Purchase Agreement, dated January 18, 2000, by and among the
          Registrant, Jedor, Inc., and certain principals of Jedor, Inc.,
          filed as Exhibit 2.2 to the registration statement filed on Form S-3
          on May 12, 2000 and hereby incorporated by reference.

                                       32

<PAGE>

10.16     Share Purchase Agreement dated as of June 1, 2000, by and among the
          Registrant, Sonic Foundry (Nova Scotia) Inc., Charles Ferkranus,
          Michael Ferkranus, 1096159 Ontario Limited, 1402083 Ontario Limited,
          Dan McLellan, Curtis Staples, Bank of Montreal Capital Corp.,
          Roynat Inc. and DGC Entertainment Ventures Corp., filed as Exhibit 2
          to the Current Report filed on Form 8-K on September 12, 2000, and
          hereby incorporated by reference.

10.17     Voting and Option Agreement, dated March 15, 2000, among the Company,
          certain of its stockholders, and Jan Brzeski, David Fife,
          Jeffrey Gerst, and Fife Waterfield, filed as Exhibit 4.3 to the
          Registration Statement filed on Form S-3 on May 12, 2000, and hereby
          incorporated by reference.

10.18     Subscription Agreement dated February 8, 2000 between Subscribers and
          the Company, filed as Exhibit 10.19 of a Current Report on Form 8-K
          dated February 14, 2000, and hereby incorporated by reference.

10.19     Registration Rights Agreement, dated February 8, 2000, by and among
          the Company and certain investors, filed as Exhibit 4.5 to the
          Registration Statement filed on Form S-3 on May 12, 2000, and hereby
          incorporated by reference.

10.20     Registration Rights Agreement, dated March 31, 2000, among the Company
          and Sony Pictures Entertainment Inc., filed as Exhibit 4.6 to the
          Registration Statement filed on Form S-3 on May 12, 2000, and hereby
          incorporated by reference.

10.21     Buyer Non-Voting Exchangeable Share Option Agreement, dated August 24,
          2000, among the Registrant, Dan McLellan, Curtis Staples, and Sonic
          Foundry (Nova Scotia), Inc., filed as Exhibit 4.3 to the Registration
          Statement filed on Form S-3 on November 7, 2000, and hereby
          incorporated by reference.

10.22     Support Agreement, dated August 24, 2000, between the Company and
          Sonic Foundry (Nova Scotia), Inc. filed as Exhibit 4.4 to the
          Registration Statement filed on Form S-3 on November 7, 2000 and
          hereby incorporated by reference.

10.23     Commercial Lease between Ewart Associates, L.P. and Sonic Foundry
          Systems Group, Inc. (now known as Sonic Foundry Media Systems, Inc.),
          dated November 30, 2001. Term of December 1, 2001 through June 30,
          2005; lease of a single floor of commercial space in downtown
          Pittsburgh, PA for media systems subsidiary. Monthly rent of $11,125.

                                       33

<PAGE>

10.24     Commercial Lease between Stonewood East and Sonic Foundry Media
          Systems, Inc. dated January 13, 2002.  Term of January 31, 2002
          through January 31, 2004; lease of single floor of commercial space in
          Wexford, PA for media systems subsidiary.  Monthly rent of $8,253.66.

10.25     Asset Purchase Agreement and Plan of Asset Transfer and Reorganization
          dated September 6, 2001 by and among Sonic Foundry, Inc., Sonic
          Foundry Systems Group, Inc. (formerly known as MediaSite Acquisition,
          Inc.), and MediaSite, Inc., filed as Exhibit No. 2.1 to the Current
          Report on Form 8-K dated October 30, 2001, and hereby incorporated by
          reference.

10.26     Asset Purchase Agreement dated February 6, 2002 by and among Sonic
          Foundry Media Services, Inc. and Digital Savant, Inc.

10.27     Registrant's 2001 Deferred Compensation Plan, filed as Exhibit 4.4 to
          Form S-8 on November 21, 2001 and hereby incorporated by reference.

10.28     Stock Restriction and Registration Agreement between Sonic Foundry,
          Inc., Zero Stage Capital VI Limited Partnership, Saturn Capital, Inc.
          and Saturn Partners Limited Partnership dated October 15, 2001 filed
          as Exhibit 4.4 to Form S-3 filed on December 21, 2001, and hereby
          incorporated by reference.

10.29     Registrant's Amended 1999 Non-Qualified Plan, filed as Exhibit 4.1 to
          Form S-8 on December 21, 2001, and hereby incorporated by reference.

10.30     Software License and Marketing Agreement effective as of March 25,
          2002 between Registrant and Broderbund Properties LLC; CONFIDENTIAL
          TREATMENT REQUESTED.

10.31     Amended and Restated License Agreement effective October 15, 2001
          between Carnegie Mellon University and MediaSite, Inc.

                                       34

<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)

May 14, 2002                          By:  /s/ Rimas P. Buinevicius
                                           -----------------------------
                                           Rimas P. Buinevicius
                                           Chairman and Chief Executive Officer

May 14, 2002                          By:  /s/ Kenneth A. Minor
                                           -----------------------------
                                           Kenneth A. Minor
                                           Chief Financial Officer and Secretary