<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 June 30, 2001
                                -------------

                                       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                        August 13, 2001
                -----                        ---------------
          Common Stock, $0.01 par value         22,292,082
<PAGE>

                              SONIC FOUNDRY, INC.
                         QUARTERLY REPORT ON FORM 10-Q
                          QUARTER ENDED JUNE 30, 2001


                               TABLE OF CONTENTS


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

Item 1.   Consolidated Financial Statements

          Consolidated Balance Sheets - June 30, 2001 (Unaudited)
           and September 30, 2000...............................................................      3

          Consolidated Statements of Operations (Unaudited) -
            Nine months ended June 30, 2001 and 2000 and the Three
            months ended June 30, 2001 and 2000.................................................      5

          Consolidated Statements of Cash Flows (Unaudited) -
            Nine months ended June 30, 2001 and 2000............................................      6

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

Item 2.   Management's Discussion and Analysis of Financial
           Condition and Results of Operations..................................................     10

Item 3.   Quantitative and Qualitative Disclosures
           About Market Risk....................................................................     17

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings.....................................................................     18

Item 4.   Submission of Matters to a Vote of Security Holders...................................     18

Item 6.   Exhibits and Reports on Form 8-K......................................................     19
</TABLE>

                                       2
<PAGE>

                              Sonic Foundry, Inc.
                          Consolidated Balance Sheets
                     (in thousands except for share data)

<TABLE>
<CAPTION>
                                                                      June 30,         September 30,
                                                                        2001               2000
                                                                 ----------------------------------
                                                                    (Unaudited)
<S>                                                              <C>                   <C>
Assets
Current Assets:
 Cash and cash equivalents                                            $   9,608         $   21,948
 Accounts receivable, net of allowances of $2,122 and $1,209
  at June 30, 2001 and September 30, 2000                                 5,082              9,075
 Accounts receivable, other                                                  57                355
 Revenues in excess of billings for software license fees                     -                105
 Inventories                                                                984              1,906
 Prepaid expenses and other current assets                                  763              1,591
 Prepaid advertising                                                      1,000              1,000
                                                                 ---------------------------------
Total current assets                                                     17,494             35,980

Property and equipment:
 Land                                                                         -                 95
 Buildings and improvements                                               2,382              3,186
 Equipment                                                               15,672             15,370
 Furniture and fixtures                                                     545                504
 Assets held for sale                                                        77                  -
                                                                 ---------------------------------
   Total property and equipment                                          18,676             19,155
 Less accumulated depreciation                                            4,795              3,071
                                                                 ---------------------------------
Net property and equipment                                               13,881             16,084

Other assets:
 Goodwill and other intangibles, net                                     51,302             73,632
 Capitalized software development costs, net                                150                518
 Long-term investment                                                       514                514
 Other assets                                                                40                 97
                                                                 ---------------------------------
Total other assets                                                       52,006             74,761
                                                                 ---------------------------------
Total assets                                                          $  83,381         $  126,825
                                                                 =================================
</TABLE>

See accompanying notes.

                                       3
<PAGE>

                              Sonic Foundry, Inc.
                          Consolidated Balance Sheets
                     (in thousands except for share data)

<TABLE>
<CAPTION>
                                                                             June 30,        September 30,
Liabilities and stockholders' equity                                           2001              2000
                                                                     --------------------------------------
<S>                                                                  <C>                   <C>
Current liabilities:
 Accounts payable                                                      $      1,879        $     5,231
 Accrued liabilities                                                          2,159              2,819
 Accrued restructuring charges                                                  341                  -
 Current portion of long-term debt                                            4,042              4,300
 Current portion of capital lease obligations                                 1,329              1,477
 Other current liabilities                                                       76                  -
                                                                     --------------------------------------
Total current liabilities                                                     9,826             13,827

 Long-term obligations, net of current portion                                  258                923
 Capital lease obligations, net of current portion                              805              1,703
 Other liabilities                                                               29                  6

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; 22,304,126 and 21,904,574 shares issued and
  22,276,376 and 21,876,824 outstanding at June 30, 2001                        223                219
  and September 30, 2000
 Common stock to be issued                                                    5,579              5,579
 Additional paid-in capital                                                 147,740            148,290
 Accumulated deficit                                                        (80,874)           (42,388)
 Receivable for common stock issued                                             (26)               (72)
 Cumulative foreign currency translations/adjustments                           (29)               137
 Unearned compensation                                                            -             (1,249)
 Treasury stock, at cost, 27,750 shares                                        (150)              (150)
                                                                     --------------------------------------
Total stockholders' equity                                                   72,463            110,366
                                                                     --------------------------------------
Total liabilities and stockholders' equity                             $     83,381        $   126,825
                                                                     ======================================
</TABLE>

See accompanying notes.

                                       4
<PAGE>

                              Sonic Foundry, Inc.
                           Statements of Operations
                                  (Unaudited)
                   (in thousands except for per share data)

<TABLE>
<CAPTION>

                                                            Three Months Ended                Nine Months Ended
                                                                  June 30,                        June 30,
                                                            2001           2000             2001          2000
                                                  --------------------------------------------------------------------
<S>                                               <C>                 <C>              <C>             <C>
Revenue:
Software license fees                                  $    4,161     $    5,115       $   12,683      $   15,800
Media services                                              2,933          1,627            8,193           2,030
                                                  --------------------------------------------------------------------
  Total revenue                                             7,094          6,742           20,876          17,830

Cost of revenue:
Cost of software license fees                               1,171          1,220            4,365           3,424
Cost of media services                                      1,793          1,773            6,083           2,247
                                                  --------------------------------------------------------------------
  Total cost of revenue                                     2,964          2,993           10,448           5,671
                                                  --------------------------------------------------------------------

Gross margin                                                4,130          3,749           10,428          12,159

Operating expenses:
Selling and marketing expenses                              1,973          5,711           10,140          13,778
General and administrative expenses                         2,231          3,864            7,922           7,039
Product development expenses                                1,685          2,238            6,312           4,950
Amortization of goodwill and other intangibles              6,726          6,793           20,753           6,793
Restructuring expenses                                          -              -            3,782
                                                  --------------------------------------------------------------------
  Total operating expenses                                 12,615         18,606           48,909          32,560
                                                  --------------------------------------------------------------------
Loss from operations                                       (8,485)       (14,857)         (38,481)        (20,401)

Other income (expense):
Interest expense                                             (141)           (45)            (513)           (270)
Interest and other income                                      90            593              508           1,688
                                                  --------------------------------------------------------------------
  Total other income                                          (51)           548               (5)          1,418
                                                  --------------------------------------------------------------------

Net loss before taxes                                      (8,536)       (14,309)         (38,486)        (18,983)
Income tax benefit                                              -              8                -               8
                                                  --------------------------------------------------------------------
Net loss                                               $   (8,536)    $  (14,301)      $  (38,486)     $  (18,975)
                                                  ====================================================================

Loss per common share -
Basic                                                  $     (.39)    $     (.66)      $    (1.75)     $    (1.10)
                                                  ====================================================================
Diluted                                                $     (.39)    $     (.66)      $    (1.75)     $    (1.10)
                                                  ====================================================================
</TABLE>

  See accompanying notes.

                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        Nine months ended
                                                                                                             June 30,
                                                                                                    2001                2000
                                                                                               -------------------------------
<S>                                                                                               <C>                 <C>
Operating activities
Net loss                                                                                       $   (38,486)        $   (18,975)
Adjustments to reconcile net loss to net cash used in operating activities:
 Amortization of goodwill and other intangibles                                                     20,753               6,793
 Depreciation and amortization of property and equipment                                             2,566               1,528
 Amortization of capitalized software development                                                      368                 442
 Non-cash charge for common stock warrants and options                                                 550                 343
 Amortization of debt discount and debt issuance costs                                                   -                 163
 Amortization of unearned compensation                                                                   -                  50
 (Gain)/Loss on disposal of assets and investments                                                   1,557                (650)
 Income tax benefit                                                                                      -                  (8)
 Changes in operating assets and liabilities:
  Accounts receivable and revenues in excess of billings                                             4,396              (3,893)
  Inventories                                                                                          922                (921)
  Prepaid expenses and other assets                                                                    750                (462)
  Accounts payable and accrued liabilities                                                          (2,870)              1,029
                                                                                               -------------------------------
Total adjustments                                                                                   28,992               4,414
                                                                                               -------------------------------

Net cash used in operating activities                                                               (9,494)            (14,561)

Investing activities
Acquisition, net of cash acquired                                                                     (679)             (4,042)
Purchases of property and equipment                                                                 (1,955)             (4,927)
Proceeds on sales of property and equipment                                                          1,213               1,000
                                                                                               -------------------------------
Net cash used in investing activities                                                               (1,421)             (7,969)

Financing activities
Proceeds from sale of common stock, net of issuance costs                                              300              53,381
Borrowings on line of credit, net                                                                      595                   -
Proceeds from debt                                                                                     436                   -
Payments on long-term debt and capital leases                                                       (2,887)               (212)
                                                                                               -------------------------------
Net cash (used in)/provided by financing activities                                                 (1,556)             53,169
                                                                                               -------------------------------
Effect of exchange rate changes on cash                                                                131                   -
                                                                                               -------------------------------

Net increase/(decrease) in cash                                                                    (12,340)             30,639
Cash and cash equivalents at beginning of period                                                    21,948               5,889
                                                                                               -------------------------------
Cash and cash equivalents at end of period                                                     $     9,608         $    36,528
                                                                                               ===============================
</TABLE>

See accompanying notes.

                                       6
<PAGE>

<TABLE>
<S>                                                                                            <C>            <C>
Supplemental cash flow information:
 Interest paid                                                                                    $  258      $    76
Noncash transactions -
  Capital lease acquisitions                                                                          86        1,365
  Issuance of stock in exchange for future advertising                                                 -        2,500
  Issuance of stock for acquisition of Jedor                                                           -          300
  Issuance of stock and stock options for acquisition of STV                                           -       72,480
  Stock to be issued for acquisition of International Image                                            -        6,900
  Cash to be paid for acquisition of International Image at close                                      -        8,000
  Reclassification of goodwill to fixed assets upon final appraisal of International Image         1,281            -
  Reduction of goodwill upon settlement of notes due certain International Image
    shareholders                                                                                     200            -
  Cancellation of unvested stock options classified as unearned compensation upon acquisition
    of STV                                                                                         1,249            -
  Issuance of warrants for consulting services                                                        19          696
  Conversion of subordinated debt and associated debt issuance costs and accrued interest
    into common stock                                                                                  -        2,890
</TABLE>

See accompanying notes.

                                       7
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)



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, 2000. 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 periods
presented are not necessarily indicative of the results that might be expected
for the year ended September 30, 2001.

Inventories

Inventory consists of the following (in thousands):

                                                   June 30,       September 30,
                                                     2001             2000
                                                 -------------------------------
Raw materials and supplies                           $ 434              $1,121
Work-in-process                                        304                 213
Finished goods                                         246                 572
                                                 -------------------------------
                                                     $ 984              $1,906
                                                 ===============================

Net Loss Per Share

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

<TABLE>
<CAPTION>
                                                         Three Months            Nine Months
                                                        Ended June 30,         Ended June 30,
                                                        2001      2000         2001      2000
                                                 -------------------------------------------------
Denominator
<S>                                                 <C>        <C>          <C>        <C>
Denominator for basic and diluted loss per
 share - weighted average common shares
                                                    22,127,533 21,557,209   21,999,981 17,312,753
                                                  ================================================
Securities that could potentially dilute
 basic earnings per share in the future that
 are not included in the computation of
 diluted loss per share as their impact is
 antidilutive (treasury stock method)
      Options and warrants                             787,108    605,517      904,621  2,838,885
      Common stock to be issued                        485,100    600,000      485,100    600,000
</TABLE>

                                       8
<PAGE>

Accounting Pronouncements

In May 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 00-14, "Accounting for Certain Sales Incentives."  EITF No. 00-14 requires
cash rebates to be classified as a reduction of revenue rather than a marketing
expense.  Historically, the Company has recognized revenue for products with
cash rebates on a gross basis at the time of the sale, and cash rebates expected
to be claimed were charged to marketing expense.  Adoption of EITF No. 00-14
affects the presentation of rebates in the statement of operations, but does not
affect the loss from operations reported.  EITF No. 00-14 is required to be
adopted beginning July 1, 2001, however, the Company has elected to make it
effective October 1, 2000.  Prior periods presented for comparative purposes
have been reclassified to comply with the new presentation requirements.  For
the quarter ended June 30, 2001 and 2000, rebates were $331,000 and $132,000
respectively.

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company will
apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal 2003. If adopted for fiscal 2002 the
nonamortization provisions of the Statement would result in a decrease in net
loss of $26,904,000 ($1.21 per share) per year. The Company will perform the
first required impairment tests of goodwill and indefinite lived intangible
assets as of October 1, 2002 and has not yet determined what the effect of these
tests will be on earnings and financial position of the Company.

2.  Restructuring Charge

As a result of rapidly changing market conditions, in December 2000 the Board of
Directors authorized management to make a 40% workforce reduction in order to
improve cash flow.  The restructuring charges were determined based on plans
submitted by the Company's management and approved by the Board of Directors
using information available at the time.  As a result of this reduction, the
Company recorded restructuring charges of $3,782,000 during the first quarter of
fiscal 2001 and recorded a restructuring accrual of $2,557,000.  The accrual was
reduced by $2,070,000 in the second quarter of fiscal 2001 and $146,000 in the
third quarter.  No additional restructuring charges were recorded in the second
and third quarters, however, the Company continues to evaluate whether any
further charges are necessary.

3.  Subsequent Events

In early January 2001, a $4 million note was due the former shareholders of
International Image.  We withheld paying the note pending the resolution of
certain disputed representations made during the acquisition.  In January 2001
the noteholders initiated litigation against us in Toronto for payment of the
note and in March, 2001 we initiated a counter action for damages incurred.  In
April 2001, we paid the minority shareholders $500,000 in full settlement of
$700,000 of the note plus accrued interest originally owed. Litigation with the
majority shareholders is still pending.

                                       9
<PAGE>

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, 2000. 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 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 digital media
solutions provider with two primary revenue centers: a software product
division, with a full suite of software products utilized by both producers and
consumers of digital media; and a media services division, which provides
broadcast conversion, tape duplication, audio and video encoding, video-on-
demand production work and consulting services.  We analyze these two revenue
centers, along with their respective production costs, independently from each
other.  However, because the majority of our operating expenses support both
revenue centers, we analyze all items below gross margin on a combined basis.

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 June 30,           Nine Months Ended June 30,
                                                       2001                2000            2001                 2000
                                               ------------------------------------------------------------------------
<S>                                                <C>       <C>      <C>      <C>      <C>      <C>    <C>       <C>
Software license fees                              $4,161    100%     $5,115   100%     $12,683  100%   $15,800    100%
Cost of software license fees                       1,171     28       1,220    24        4,365   34      3,424     22
                                               ------------------------------------------------------------------------
 Gross margin-software license fees                $2,990     72%     $3,895    76%     $ 8,318   66%   $12,376     78%
                                               ========================================================================


Media services                                     $2,933    100%     $1,627   100%     $ 8,193  100%   $ 2,030    100%
Cost of media services                              1,793     61       1,773   109        6,083   74      2,247    111
                                               ------------------------------------------------------------------------
 Gross margin-media services                       $1,140     39%     $ (146)  (9)%     $ 2,110   26%   $  (217)  (11)%
                                               ========================================================================
</TABLE>

                                       10
<PAGE>

Total Net Revenue

Total net revenues increased 5% to $7,094 for the three months ended June 30,
2001 from $6,742 in the comparable period of 2000.

Total net revenues increased 17% to $20,876 for the nine months ended June 30,
2001 from $17,830 in the comparable period of 2000.

The overall net increase in revenue for both periods is due to our acquired
service businesses.  We began consolidated reporting with STV Communications,
Inc. ("STV") in April 2000 and with International Image ("II") in June 2000.

The revenue from our traditional software business declined for both periods,
primarily because of a decline in revenues from our OEM partners and reduced
sales in the retail channel.

Net revenues from international customers accounted for 27% and 15% of total net
revenues for the nine months ended June 30, 2001 and 2000, respectively.  The
significant increase is primarily due to the acquisition of International Image,
which has an office located in Toronto that services primarily Canadian clients.

For detailed information on revenue recognition principles, see Note 1 to the
audited financial statements in the annual report filed as part of Form 10-K for
the fiscal year ended September 30, 2000.

Revenue from Software License Fees

Revenues from software license fees consist of fees charged for the licensing of
Windows based software products that are built on the principle of "Create" (the
ACID(TM) family), "Edit" (Sound Forge(R), Sound Forge Studio XP, Vegas(R) Audio,
Vegas(R) Video, VideoFactory(TM)) and "Deliver" (Siren(TM) Jukebox and Stream
Anywhere). These software products are marketed to all levels of 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.

   Three months ended June 30, 2001 ("Q3-2001") compared to the three months
                              ended June 30, 2000
 ("Q3-2000") and the nine months ended June 30, 2001 ("YTD-2001") compared to
               the nine months ended June 30, 2000 ("YTD-2000")

Net revenues from software license fees decreased $954 from Q3-2000 to Q3-2001
and decreased $3,117 from YTD-2000 to YTD-2001.  Both the quarterly and the
year-to-date decline resulted from the following items:

  .  Revenue from our retail channel declined $1,082 from Q3-2000 to Q3-2001 and
     $2,319 from YTD-2000 to YTD-2001. The overall weakening in the retail
     market primarily impacted sales of Siren, which declined 90% from Q3-2000
     to Q3-2001. Our decision to adopt EITF 00-14 prior to effectiveness of the
     pronouncement also impacted retail

                                       11
<PAGE>

     revenues this quarter. EITF 00-14 relates to rebates and other sales
     incentives and requires that they be accounted for as a reduction of
     revenues rather than as a marketing expense. Q3-2001 rebates were $331
     compared to $132 in Q3-2000.

  .  Revenue generated from OEM partners declined $1,187 from Q3-2000 to Q3-2001
     and $3,627 from YTD-2000 to YTD-2001. This is due primarily to a recent
     trend towards OEM's bundling much larger volumes of a scaled-down version
     of our product with their hardware or software in exchange for mass
     marketing opportunities intended to drive upgrade revenues through our
     direct sales channel. In addition, Q3-2000 OEM revenue of $1,431 included a
     one-time licensing transaction with Pinnacle Systems, Inc., custom software
     development revenues from the recently completed Screenblast project for
     Sony Pictures and revenues from Hewlett Packard Company under a contract
     that expired September 2000. OEM revenues were $244 in the current quarter.

  .  Revenues from our direct channel increased $1,315 from Q3-2000 to Q3-2001
     and $2,829 from YTD-2000 to YTD-2001. The launch of ACID Pro 3.0,
     continuing demand for Sound Forge 5.0 and a number of email-based
     promotional offers targeted at several thousand potential buyers was the
     primary reason for the growth. Direct revenues were 53% of software license
     fees in Q3-2001.

Costs of Software License Fees

Costs of software license fees include product material costs, contracted and
internal assembly labor, freight, royalties on third party technology or
intellectual content, and amortization of previously capitalized product
development and localization costs.

         Q3-2001 compared to Q3-2000 and YTD-2001 compared to YTD-2000

Cost of software license fees decreased to $1,171 in Q3-2001, the lowest since
Q2-2000, and improved slightly from $1,220 in Q3-2000.   However, it increased
as a percentage of net software revenues both in Q3-2001 and YTD-2001. Both the
Q3-2001 and YTD-2001 increase are due primarily to a significant decline in
high-margin OEM revenues, an increase in royalties paid for third party
technology such as MP3 compression, an increase in amortization of capitalized
localization costs and write-offs of slow moving inventory. These gross margin
reductions have been partially offset by the growing number of downloadable
products being sold from our website.


Revenue from Media Services

In October 1999, we announced the formation of our Media Services division by
offering audio and video encoding services from our Madison location. In April
2000, we added additional encoding capabilities, hosting, streaming, syndication
and a California presence with the acquisition of STV.  In June 2000 the
acquisition of II became effective, which added tape duplication, video-on-
demand production and broadcast conversion services to our media services
division.  Since the beginning of fiscal 2001, we have sold, terminated or
reduced our

                                       12
<PAGE>

emphasis on efforts such as syndication, content hosting, webcasting and dot.com
encoding in order to concentrate on higher gross margin business; primarily
video and video-on-demand production and our Enterprise Content Management
initiative.

         Q3-2001 compared to Q3-2000 and YTD-2001 compared to YTD-2000

Net revenues from media services increased $1,306 from Q3-2000 to Q3-2001, and
increased $6,163 from YTD-2000 to YTD-2001.  Both the quarterly and the year-to-
date increases are due to the acquisition of II, which became effective on June
1, 2000.  Growth in revenues over Q1 and Q2 of the current year reflects strong
seasonal demand from our TV industry customers for our traditional videotape
conversion services.  This seasonal demand typically declines in the fourth
quarter.

Costs of Media Services

Costs of media services include compensation and benefits for direct labor,
depreciation on production equipment, and other general expenses associated with
production personnel.

         Q3-2001 compared to Q3-2000 and YTD-2001 compared to YTD-2000

Costs of media services increased $20 from Q3-2000 to Q3-2001, and $3,836 from
YTD-2000 to YTD-2001.  Both the quarterly and the year-to-date increase in
dollars resulted from the acquisition of STV and II.  As a percentage of media
services revenue, overall service margins improved to 39% for Q2-2001 and 26%
for YTD-2001.  These improvements were led by higher margin video-tape services
gained with the acquisition of II, the elimination of a permanent production
workforce for encoding services in Q1-2001 and a reduction in depreciation
expense in Q3-2001 from underutilized production assets that we intend to place
for sale.

                                       13
<PAGE>

Operating Expenses

The following chart is provided to add clarification by presenting items as a
percentage of total revenues.  This should be read in conjunction with the
unaudited consolidated financial statements presented in this filing.


<TABLE>
<CAPTION>
                                                          Three Months Ended             Nine Months Ended
                                                                June 30,                      June 30,
                                                          2001           2000           2001            2000
                                                  -----------------------------------------------------------
<S>                                               <C>                   <C>            <C>            <C>
Total revenue                                             100 %          100 %          100 %           100 %
Total cost of revenue                                      42             44             50              32
                                                  ---------------------------------------------------------
  Gross margin                                             58             56             50              68

Operating expenses:
Selling and marketing expenses                             28             85             49              77
General and administrative expenses                        31             57             38              39
Product development expenses                               24             33             30              28
Amortization of goodwill and other intangibles             95            101             99              38
Restructuring expenses                                      -              -             18               -
                                                  ---------------------------------------------------------
  Total operating expenses                                178            276            234             182
                                                  ---------------------------------------------------------
Loss from operations                                     (120) %        (220) %        (184) %         (114) %
                                                  =========================================================
</TABLE>

Selling and Marketing Expenses

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

         Q3-2001 compared to Q3-2000 and YTD-2001 compared to YTD-2000

Selling and marketing expenses decreased by $3,738 from Q3-2000 to Q3-2001, and
decreased by $3,638 from YTD-2000 to YTD-2001.  This decrease can be attributed
to the following items; 1) significant staff reductions in the sales and
marketing department in December, 2000; 2) a greater percentage of revenues
coming from the media services division, which requires less expensive, more
targeted forms of marketing; which coincides with 3) a lesser focus on more
costly brand marketing such as tradeshows and media advertising.  We will
continue to focus on our direct mail effort and co-operative advertising with
our retailers and distributors to drive software sales, as well as more targeted
forms of marketing to reach our media services clients.

                                       14
<PAGE>

General and Administrative Expenses ("G&A Expenses")

G&A expenses consist primarily of personnel and related costs associated with
the facilities, finance, executive, legal, and information technology
departments, as well as other expenses not fully allocated to functional areas.

         Q3-2001 compared to Q3-2000 and YTD-2001 compared to YTD-2000

G&A expenses decreased by $1,633 from Q3-2000 to Q3-2001, but increased by $883
from YTD-2000 to YTD-2001.  Higher G&A expenses in Q3-2000 up through Q1-2001
are primarily attributable to newly acquired companies and the integration of
multiple locations.  The restructuring that occurred at the end of Q1-2001
reduced G&A expenses by eliminating duplicative positions and consolidating
facilities.

Product Development Expenses

Product development expenses include salaries and wages of the software research
and development staff and an allocation of benefits, facility and administrative
expenses, net of product development expenses capitalized pursuant to SFAS No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed."

         Q3-2001 compared to Q3-2000 and YTD-2001 compared to YTD-2000

Product development expenses decreased by $553 from Q3-2000 to Q3-2001, but
increased by $1,362 from YTD-2000 to YTD-2001.  As a percentage of total
revenues, product development expenses decreased to 24% for Q3-2001 compared to
33% in Q3-2000, however the YTD percentage increased slightly from 28% for YTD-
2000 to 30% for YTD-2001.  The YTD increase is primarily due to product
development expenses incurred in Q1-2001, which were 43% of total revenues.  The
decrease from 43% in Q1-2001 to approximately 25% for the past two quarters, is
due to the company-wide restructuring that occurred at the end of Q1-2001.  As
part of the restructuring, we eliminated low volume, niche products such as CD
Architect and Soft Encode as well as the engineering staff 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.
No development costs for our core product line were capitalized during the
current period.  Going forward, we believe software development costs qualifying
for capitalization will be less significant, and, as such, we expect that we
will expense most or all research and development costs as incurred.


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.  This restructuring charge primarily consisted of: 1) an
accrual for 60 days of severance and benefits for domestic employees terminated
on December 20, 2000; 2) severance and other expenses associated with closing
our

                                       15
<PAGE>

office in the Netherlands; 3) an asset impairment charge related to the sale,
disposal or write-down of PCs, office equipment and other assets no longer
required; 4) operating and lease termination costs related to the consolidation
of facilities; and 5) miscellaneous charges such as forfeited tradeshow
deposits. We have not yet completed the disposal of underutilized assets,
however, at the beginning of Q3-2001 we discontinued depreciation of additional
assets no longer used in operations. The Company continues to evaluate whether
any further charges are necessary.

Amortization of Goodwill and Other Purchase Intangibles

The amortization of goodwill and other purchase intangibles consists of expense
associated with the purchases of STV and II.  STV's total purchased intangibles
consist of assembled workforce of $1 million, which was fully amortized at the
end of Q2-2001 and goodwill of $70 million, which is being amortized over a
three year period.  II's total purchased intangibles consist of assembled
workforce of $2.2 million, which is being amortized over a five year period and
goodwill of $12.9 million, which is being amortized over a three to seven year
period.  In the quarter ended December 31, 2000 we received a final appraisal of
II's fixed assets and, as a result, reclassified $1.2 million of the purchase
price from goodwill to fixed assets.  In April 2001, we paid $500 in full
settlement of a $700 note due the minority shareholders of II, which resulted in
a reduction of II's goodwill.


Liquidity and Capital Resources

Cash used in operating activities amounted to $9,493 for YTD-2001 and $14,561
for YTD-2000. Decreased use of operating cash of $5,068 from 2000 to 2001
consisted primarily of operating cost reductions identified in the Q1-2001
restructuring. On a quarterly basis, $105 cash was provided by operations in
Q3-2001 compared to cash used in operations of $7,751 in Q1-2001 and $1,847 in
Q2-2001. Contributing to the improvement in Q3-2001 were the following items; 1)
Loss from operations before amortization of goodwill and restructuring charges
continues to improve in the current fiscal year from $8,965 in Q1-2001 to $1,759
in Q3-2001, 2) Improved collections driven by increased credit card sales in our
direct channel, and 3) Reduced inventory balances due to increases in the
electronic delivery of our software products.

Cash used in investing activities was $1,421 for YTD-2001 and $7,969 for
YTD-2000. Investing uses in the current year related to $679 of legal,
accounting, and other professional fees accrued in the prior year for the II
acquisition and $1,955 for fixed asset purchases relating to our media services
effort and leasehold improvements. Partially offsetting these uses were proceeds
of $1,213 for sales of property and equipment no longer fully utilized. In
YTD-2000, fixed asset purchases of $4,927 - primarily for the media services
effort-were partially offset by the December 1999 sale of real estate no longer
needed in the Company's operations.

In YTD-2001, $1,556 was used in financing activities, with $2,887 used for
payments on debt and capital leases.  The majority of the increase in debt and
lease payments relates to lease financing for Media Services equipment obtained
in the STV transaction.  Cash provided by

                                       16
<PAGE>

financing activities includes $300 received from the sale of common stock and a
$595 draw on our line of credit in Toronto.

In November and December of 2000, we reduced headcount across all departments,
eliminated certain sales and marketing programs and discontinued non-core media
services efforts such as syndication, streaming and webcasting. These cuts were
not anticipated to and have not appeared to impact future revenue generation or
the quality of products and services we provide. Although these efforts have
allowed us to generate positive cash flow from operations in this quarter, there
can be no assurance we will maintain positive cash flow in the future due to
sales mix, market conditions and other factors.

In order to finance growth, maintain operations and pursue additional
technologies, we may pursue cash in the equity market with key strategic
partners or private investors. We are also reviewing other financing activities
such as debt and subleasing arrangements and the sale of underutilized assets.
There can be no assurance that we will obtain additional debt or equity on
satisfactory terms.

In early January 2001, a $4 million note was due the former shareholders of
International Image.  We withheld paying the note pending the resolution of
certain disputed representations made during the acquisition.  In January 2001
the noteholders initiated litigation against us in Toronto for payment of the
note and in March, 2001 we initiated a counter action for damages incurred.  In
April 2001, we paid the minority shareholders $500 in full settlement of $700 of
the note plus accrued interest originally owed. Litigation with the majority
shareholders is still pending. It is too early in the litigation to assess the
ultimate outcome or liability.


Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                       17
<PAGE>

PART II  OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Reference is made to the discussion of the case entitled 1456096 Ontario
Limited, et. al. v. Sonic Foundry (Nova Scotia) Inc., et. al. in Item I of
Part II in our 10-Q for the quarter ended March 31, 2001.

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

The Annual Meeting of Stockholders was held on May 24, 2001.  A quorum
consisting of approximately 85% 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 Frederick H. Kopko, Jr. as a Class two Director for a term of
       five years. Rimas Buinevicius, 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, 2001.

<TABLE>
<CAPTION>
                     For         Against      Abstain/Withheld
                     ---         -------      ----------------
<S>               <C>            <C>          <C>
Proposal #1       18,673,318           -           144,835
Proposal #2       18,702,811      82,940            32,402
</TABLE>

                                       18
<PAGE>

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits (see exhibit list)

(b) Reports on Form 8-K - None


ITEM 6(a)

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

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

  10.4      Employment Agreement between Registrant and Rimas Buinevicius dated
            as of 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.

  10.5      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.

  10.6      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.

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

                                       19
<PAGE>

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

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

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

  10.15     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.

  10.16     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.

  10.17     Registrant's 1999 Non-Qualified Stock Option Plan, filed on Form S-8
            on September 8, 2000, and hereby incorporated by reference.

  10.18     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.

  10.19     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.

  10.20     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.

  10.21     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.

                                       20
<PAGE>

  10.22     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.

  10.23     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.

  10.24     Stock Restriction and Registration Agreement, dated as of March 15,
            2000, among the Company, Jan Brzeski, Jeffrey Gerst, David Fife, and
            Fife Capital, L.L.C., filed as Exhibit 4.2 to the Registration
            Statement filed on Form S-3 on May 12, 2000, and hereby incorporated
            by reference.

  10.25     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.

  10.26     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.

  10.27     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.

  10.28     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.

  10.29     Share Exchange Agreement, dated August 24, 2000 among the
            Registrant, Sonic Foundry (Nova Scotia), Inc., Charles Ferkranus,
            Michael Ferkranus, 1096159 Ontario Limited, and 10402083 Ontario
            Limited, filed as Exhibit 4.2 to the Registration Statement filed on
            Form S-3 on November 7, 2000, and hereby incorporated by reference.

  10.30     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.

                                       21
<PAGE>

  10.31     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.

                                       22
<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)


August 9, 2001                           By: /s/ Rimas P. Buinevicius
                                             ------------------------
                                         Rimas P. Buinevicius
                                         Chairman and Chief Executive Officer

August 9, 2001                           By: /s/ Kenneth A. Minor
                                             --------------------
                                         Kenneth A. Minor
                                         Chief Financial Officer and Secretary

                                       23