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

                                   FORM 10-QSB
(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, 1999

                                       OR

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

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

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

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

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

                                 (608)256-3133
                          ---------------------------
                          (Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 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 10, 1999
                -----                                ------------
      Common Stock, $0.01 par value                    2,665,935

Transitional Small Business Disclosure Format (check one)
Yes               No   X
    ----             ----
<PAGE>
 
                               SONIC FOUNDRY, INC.
                         QUARTERLY REPORT ON FORM 10-QSB
                          QUARTER ENDED MARCH 31, 1999


                                TABLE OF CONTENTS

                                                                      PAGE NO.
PART I   FINANCIAL INFORMATION                                        --------

Item 1.  Financial Statements

         Balance Sheets - March 31, 1999 (Unaudited) and                  3
         September 30, 1998

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

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

         Notes to Financial Statements (Unaudited)                             7

Item 2.  Management's Discussion and Analysis of Financial                8
         Condition and Results of Operations

PART II  OTHER INFORMATION                                               16

EXHIBITS                                                                 18

SIGNATURES                                                               20

                                       2
<PAGE>
 
                               Sonic Foundry, Inc.

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                          September 30,       March 31,
                                                                              1998               1999
                                                                       --------------------------------------
<S>                                                                     <C>                <C>
Assets                                                                                       (Unaudited)
Current assets:
   Cash and cash equivalents                                            $    6,939,533     $    5,386,109
   Marketable securities                                                     3,000,000                  -
   Accounts receivable, net of allowances of $73,344 and
     $167,766 at September 30, 1998 and March 31, 1999,
     respectively                                                            1,690,175          3,404,092
   Revenues in excess of billings for software license fees                    705,263                  -
   Inventories                                                                 316,140            580,784
   Prepaid expenses and other current assets                                   285,703            361,290
                                                                       --------------------------------------
Total current assets                                                        12,936,814          9,732,275




Property and equipment:
   Land                                                                        190,000            190,000
   Buildings and improvements                                                1,491,228          1,663,647
   Equipment                                                                 1,186,818          1,584,337
   Furniture and fixtures                                                      132,802            178,827
                                                                       --------------------------------------
                                                                             3,000,848          3,616,811
   Less accumulated depreciation                                               389,863            617,367
                                                                       --------------------------------------
Net property and equipment                                                   2,610,985          2,999,444




Capitalized software development costs, net                                    401,629            370,377
Other assets                                                                       261            113,487
                                                                       --------------------------------------
Total assets                                                               $15,949,689        $13,215,583
                                                                       ======================================
</TABLE>

See accompanying notes.

                                       3
<PAGE>
 
<TABLE>
<CAPTION>
                                                                          September 30,       March 31,
                                                                              1998               1999
                                                                       --------------------------------------
Liabilities and stockholders' equity                                                         (Unaudited)
<S>                                                                       <C>                <C>
Current liabilities:
   Accounts payable                                                       $    828,086       $    639,125
   Accrued liabilities                                                         316,677            483,401
   Current portion of long-term obligations                                    636,081             48,100
                                                                       --------------------------------------
Total current liabilities                                                    1,780,844          1,170,626

Long-term obligations                                                           77,472            677,208

Contingencies                                                                        -                  -

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,
     issued and outstanding 7,223,719 shares at September 30, 1998
     and March 31, 1999                                                         72,237             72,237

   Common stock, $.01 par value, authorized 20,000,000 shares; issued and
     outstanding 2,665,935 shares at September 30, 1998 and March
     31, 1999                                                                   26,660             26,660
   Common stock warrants                                                       159,500            324,500
   Additional paid-in capital                                               15,297,096         15,297,096
   Accumulated deficit                                                      (1,464,120)        (4,352,744)
                                                                       --------------------------------------
Total stockholders' equity                                                  14,091,373         11,367,749
                                                                       --------------------------------------
Total liabilities and stockholders' equity                                 $15,949,689        $13,215,583
                                                                       ======================================
</TABLE>


See accompanying notes.

                                       4
<PAGE>
 
                               Sonic Foundry, Inc.

                            Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                              Three Months Ended                       Six Months Ended
                                                   March 31,                               March 31,
                                           1998                1999                1998                1999
                                  -------------------------------------------------------------------------------
<S>                                     <C>                <C>                  <C>                <C>
Software license fees                   $1,342,291         $ 2,760,722          $2,273,768         $ 5,516,289
Cost of software license fees              524,781             701,208             684,196           1,521,630
                                  -------------------------------------------------------------------------------
                                           817,510           2,059,514           1,589,572           3,994,659

Selling and marketing expenses             670,158           1,970,404           1,319,478           4,042,795

General and administrative
   expenses                                364,395             987,015             681,670           1,761,911
Product development expenses               130,147             657,888             237,031           1,215,522
                                  -------------------------------------------------------------------------------
                                         1,164,700           3,615,307           2,238,179           7,020,228
                                  -------------------------------------------------------------------------------
Loss from operations                      (347,190)         (1,555,793)           (648,607)         (3,025,569)

Other income (expense):
   Interest expense                        (35,646)             (2,362)            (57,736)             (5,957)
   Interest and other income                   134              51,321                 134             142,902
                                  -------------------------------------------------------------------------------
                                           (35,512)             48,959             (57,602)            136,945
                                  -------------------------------------------------------------------------------

Loss before income taxes                  (382,702)         (1,506,834)           (706,209)         (2,888,624)
Income tax expense                               -                   -                   -                   -
                                  ===============================================================================
Net Loss                                $ (382,702)        $(1,506,834)         $ (706,209)        $(2,888,624)
                                  ===============================================================================

Loss per common share -
   Basic and Diluted                   $    (0.99)         $     (0.57)         $    (2.27)        $     (1.08)
                                  ===============================================================================
</TABLE>

See accompanying notes.

                                       5
<PAGE>
 
                               Sonic Foundry, Inc.

                            Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                     Six months ended March 31,
                                                                                    1998                   1999
                                                                            ----------------------------------------
<S>                                                                            <C>                    <C>
Operating activities
Net loss                                                                       $  (706,209)           $ (2,888,624)
Adjustments to reconcile net loss to net cash used in operating
   activities:
     Depreciation and amortization                                                  85,610                 228,190
     Amortization of debt discount                                                   5,417                       -
     Amortization of capitalized software development costs                         67,345                 132,863
     Loss on disposal of property and equipment                                          -                     754
     Noncash charge for common stock warrants                                            -                  51,600
     Changes in operating assets and liabilities:
       Accounts receivable                                                        (441,936)             (1,008,654)
       Inventories                                                                 (82,207)               (264,644)
       Prepaid expenses and other assets                                           (55,913)                (75,587)
       Accounts payable and accrued liabilities                                    363,697                 (22,237)
                                                                            ----------------------------------------------
Total adjustments                                                                  (57,987)               (957,715)
                                                                            ----------------------------------------------
Net cash used in operating activities                                             (764,196)             (3,846,339)

Investing activities
Purchases of property and equipment                                               (190,308)               (621,086)
Proceeds from sale of marketable securities                                              -               3,000,000
Proceeds from disposals of property and equipment                                        -                   3,857
Capitalized software development costs                                            (248,299)               (101,611)
                                                                            ----------------------------------------------
Net cash provided by (used in) investing activities                               (438,607)              2,281,160

Financing activities
Initial public offering costs                                                     (153,342)                      -
Proceeds from sale of common stock, net of issuance costs                          655,600                       -
Proceeds from debt                                                               1,022,200                 632,000
Payments on line of credit, net                                                   (220,000)                      -
Payments on long-term debt                                                         (21,223)               (620,245)
                                                                            ----------------------------------------------
Net cash provided by financing activities                                        1,283,235                  11,755
                                                                            ----------------------------------------------

Net increase (decrease) in cash                                                     80,432              (1,553,424)
Cash and cash equivalents at beginning of period                                   114,737               6,939,533
                                                                            ==============================================
Cash and cash equivalents at end of period                                     $   195,169            $  5,386,109
                                                                            ==============================================

Supplemental cash flow information:
   Interest paid                                                               $    59,056            $      5,957
   Noncash transactions -
     Conversion of notes payable into common stock                                  40,000                       -
</TABLE>

See accompanying notes.

                                       6
<PAGE>
 
1. Basis of Presentation and Significant Accounting Policies

Interim Financial Data

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

Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the Company's annual report filed on Form
10-KSB for the fiscal year ended September 30, 1998. 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, 1999 are not necessarily indicative of the results that might be
expected for the year ended September 30, 1999.

2. Net Loss Per Share

The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
                                                             Three Months          Six Months Ended
                                                            Ended March 31,             March 31,
                                                          1998         1999         1998         1999
                                                      ---------------------------------------------------
<S>                                                   <C>           <C>           <C>          <C>
Denominator
Denominator  for basic and diluted  loss per share -
   weighted average common shares                       385,827     2,665,935      311,627     2,665,935
                                                      ===================================================
Securities that could potentially dilute basic
   earnings per share in the future that are
   not included in the computation of diluted loss
   per share as their impact is antidilutive
   (treasury stock method)
     Options and warrants                               380,817       566,881      373,428       529,143
     Convertible Series B Preferred Stock             3,439,866     3,611,860    3,439,866     3,611,860
</TABLE>

3. Contingencies and subsequent event

In June 1998 the Board of Directors approved the issuance of guarantees of
certain obligations of certain officers of the Company. The guarantees were
executed in June and July of 1998 to a bank in order to facilitate the issuance
of loans to the officers. The guarantees carry an aggregate maximum limit of
approximately $300,000.

During the quarter ended March 31, 1999, the Company guaranteed the operating
lease of another company in exchange for common stock of the lessee. The
operating lease has a

See accompanying notes.

                                       7
<PAGE>
 
five-year term with aggregate base lease payments of approximately $500,000.
Subsequent to March 31, 1999, the Company purchased additional shares of common
stock in the company for $500,000. The Company owns less than 20% of the other
company; accordingly, the investment will be accounted for using the cost
method.


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

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the financial statements and
notes thereto included elsewhere in this form 10-QSB and the Company's annual
report filed on form 10-KSB for the fiscal year ended September 30, 1998. In
addition to historical information, this discussion contains forward-looking
statements such as statements of the Company's expectations, plans, objectives
and beliefs. These statements use such words as "may", "will", "expect",
"anticipate", "believe", "plan", and other similar terminology. Actual results
could differ materially due to changes in the market acceptance of Sonic
Foundry's products, market introduction or product development delays, global
and local business conditions, legislation and governmental regulations,
competition, the Company's ability to effectively maintain and update its
product portfolio, shifts in technology, political or economic instability in
local markets, and currency and exchange rates.

Overview

The Company is a leading provider of audio software products designed to run
under the Windows and Windows NT operating systems. The Company's current
products allow musicians, audio engineers and home users the ability to create,
edit and deliver audio files and record or master their own audio CD's. The
Company has also developed, and expects to continue developing, production and
encoding software tools for Internet and Intranet content developers.

The Company began shipment of Sound Forge, a Windows based audio editing
software program developed by one of the Company's founders, in 1994. By 1996,
the Company had released Sound Forge versions 3.0 and 4.0, which significantly
expanded the effects and processes available in its editor, thereby meeting the
needs of professional musicians and audio engineers. Additionally, the product
line was expanded to include Sound Forge XP, a scaled down version of Sound
Forge, as well as various plug-in products whose functions include noise
reduction, spectrum analysis and batch conversion. In June 1997, the Company
released CD Architect, an audio mastering software product and in August 1997,
offered a convolution algorithm called Acoustic Mirror, which allows users to
map the acoustic signature of any environment upon an audio file. In January
1998 the Company began shipping Soft Encode, a software product which provides
an economical

See accompanying notes.

                                       8
<PAGE>
 
method of authoring Dolby-certified AC-3 files, and in May 1998, the Company
released a music creation software product called ACID. ACID allows musicians,
media professionals, Internet developers and others to compose royalty free,
loop based music. The Company expects the product, which includes hundreds of
pre-recorded loops, to have broad-based use among customers who create and
enhance dance music, add background music to business and entertainment videos
and develop web pages. Additionally, in October 1998, the Company introduced
consumer versions of ACID for home entertainment use. Both ACID products are
supported by loop library CD's which offer professionals and consumers a variety
of music genres to choose from when composing music.

In June 1998, the Company completed an initial public offering of 2,097,775
shares of common stock and 1,145,387 common stock purchase warrants. The Company
is using and intends to continue using the net proceeds of the offering of
$13,258,359 for development of new products, capital expenditures, sales and
marketing, expansion of internal operations, potential acquisition activities
and/or joint venture activities and working capital and general corporate
purposes.

In November 1998, the Company announced the beta release of Windows Media
On-Demand Producer ("WMODP"), a product utilizing the Company's Vegas technology
(a development allowing a software specific solution to audio and video
authoring) and developed under contract with Microsoft Corporation. Designed for
both the experienced web developer and new entrants to the streaming media
market, WMODP delivers production and encoding features for Internet and
Intranet content developers who are deploying media content in areas such as
communication, entertainment and training. Microsoft began distributing the
final release of this new encoding tool in February 1999 as a no-charge addition
to the Windows Media tools available on the Microsoft Windows Media Technologies
website. While no revenues will be realized directly from the agreement with
Microsoft, the Company expects to generate greater brand recognition and access
to Microsoft customers. The Company anticipates that certain users of WMODP will
require more features than those found in WMODP. The Company retained the
product rights to WMODP, allowing the Company to offer those users Stream
Anywhere, a product with the same look and feel as the WMODP but with the
ability to encode media in multiple formats including the RealNetworks
RealSystem G2, MPEG-1, MP3 and Apple Quick-Time. Stream Anywhere was released as
a free beta download from the Company's web site in March 1999 and is expected
to be sold in its final form by the summer of 1999. The Company has made, and
may continue to make, investments in related areas such as high-speed Internet
access cable modem companies.

The Company invested significant resources in sales, marketing, research and
other operating activities during the last several years. During the quarter
ended December 31, 1998, the Company initiated a marketing campaign for its
consumer products, - ACID Music, ACID DJ and ACID Rock. Many of these
initiatives, including in-store promotions, radio ads, trade shows, print ads
and other promotions, continued or were

See accompanying notes.

                                       9
<PAGE>
 
expanded upon in the current quarter. The Company believes some of the benefits
of these expenditures are being realized now but expects the full impact to take
one to two years. The Company believes that its success depends largely on
developing brand recognition early in a product's life cycle, building superior
technology and quality into its products, and extending its technological lead
on the competition. Accordingly, the Company expects operating costs to increase
in the near future, especially in periods of new product or market
introductions.

In light of the Company's limited operating history and rapid improvements in
technology and marketing of its products, the Company believes that its revenues
and operating results, including its gross profit and operating expenses as a
percentage of total net revenues, will vary significantly from period to period.
The Company's efforts in developing OEM bundling arrangements with hardware and
software developers have contributed, and are expected to continue contributing,
to this variability. Such OEM transactions typically have higher margins and
volumes than traditional distribution methods and may be material in certain
periods.


Results of Operations

Software License Fees

Revenues consist of fees charged for the licensing of Windows based software
products including Sound Forge, Sound Forge XP, CD Architect, Acoustic Mirror,
Soft Encode, ACID and various plug-in products and music libraries. Software
license fees are recognized upon delivery, net of allowances for estimated
returns, provided that no significant obligations of the Company remain and
collection of the resulting receivable is deemed probable. Revenues from
software license agreements with OEMs are recognized when the software product
has been delivered to the OEM, the fee to the Company is fixed and determinable,
and collectibility is probable. Additionally, revenues include fees recorded
pursuant to long-term contracts, using the percentage of completion method of
accounting, when significant customization or modification is required. Software
license fees increased by $1,329,000, or 106%, to $2,761,000 for the three-month
period ended March 31, 1999 from $1,419,000 during the three-month period ended
March 31, 1998. Software license fees increased by $3,242,000, or 143%, to
$5,516,000 for the six-month period ended March 31, 1999 from $2,274,000 during
the six-month period ended March 31, 1998. The increases resulted primarily from
the release of the ACID family of products in 1998. The retail sales sector saw
the greatest increase in revenues, fueled by the October 1998 introduction of
the consumer versions of ACID, including ACID DJ, ACID Rock and ACID Music. The
remainder of the increase was attributable to growth from existing products
driven by expenditures on sales and marketing personnel, advertising and other
product marketing activities.

See accompanying notes.

                                       10
<PAGE>
 
Software license fees to customers outside of North America accounted for 12.7%
and 24.7% of software license fees for the three-month periods ended March 31,
1998 and 1999, respectively and were 13.1% and 18.8% of software license fees
for the six-month periods ended March 31, 1998 and 1999, respectively. Increases
in the percentage of revenues from sources outside North America reflect the
onsite sales and marketing efforts of the Company's recently established office
in Delft, Netherlands.


Cost of Software License Fees

Cost of software license fees increased by $176,000 to $701,000 for the
three-month period ended March 31, 1999 from $525,000 during the three-month
period ended March 31, 1998 and were 39.1% and 25.4% of software license fees
during the 1998 and 1999 periods, respectively. Cost of software license fees
increased by $838,000 to $1,522,000 for the six-month period ended March 31,
1999 from $684,000 during the six-month period ended March 31, 1998 and were
30.1% and 27.6% of software license fees during the 1998 and 1999 periods,
respectively. The majority of the decreases as a percentage of net software
license fees resulted primarily from a shift in mix toward higher margin
stand-alone software sales versus products bundled with purchased third party CD
recordable disk drives. Royalty costs partially offset these reduced material
costs, both in absolute dollars and as a percentage of software license fees,
due to agreements reached with artists to license the distribution of various
audio loops included in the Company's ACID products and sold separately in loop
libraries. The remainder of the increase in absolute dollars related to the
increased volume of software products sold during the period.


Selling and Marketing Expenses

Selling and marketing expenses increased by $1,300,000 to $1,970,000 during the
three-month period ended March 31, 1999 from $670,000 during the three-month
period ended March 31, 1998 and were 49.9% and 71.4% as a percentage of software
license fees, respectively. Selling and marketing expenses increased by
$2,724,000 to $4,043,000 during the six-month period ended March 31, 1999 from
$1,319,000 during the six-month period ended March 31, 1998 and were 58.0% and
73.3% as a percentage of software license fees, respectively. Increased selling
and marketing costs in absolute dollars were impacted in large part by marketing
and promotional expenses relating to its new line of ACID consumer products,
including trade shows, print and radio advertisements, concert promotions, store
demos and other marketing related activities. Both absolute dollars and costs as
a percentage of software license fees were impacted by European trade show and
other marketing costs incurred by the Company's recently established sales and
marketing office in Delft, Netherlands. The remaining increase related to
personnel costs to support the growth in revenues from existing products and for
future product releases.


See accompanying notes.

                                       11
<PAGE>
 
General and Administrative Expenses

General and administrative expenses increased by $623,000 to $987,000 during the
three-month period ended March 31, 1999 from $364,000 during the three-month
period ended March 31, 1998 and were 27.1% and 35.7% as a percentage of software
license fees, respectively. General and administrative expenses increased by
$1,080,000 to $1,762,000 during the six-month period ended March 31, 1999 from
$682,000 during the six-month period ended March 31, 1998 and were 30.0% and
31.9% as a percentage of software license fees, respectively. The increase in
both absolute dollars and as a percentage of software license fees related to
wages and related recruitment and benefit costs, professional fees, facility
costs, and other expenses. These costs were required to build an infrastructure
to support existing and future products and to satisfy reporting and other
requirements of a public company.


Product Development Expenses

Product development expenses increased by $528,000 to $658,000 during the
three-month period ended March 31, 1999 from $130,000 during the three-month
period ended March 31, 1998. Product development expenses as a percentage of
software license fees were 9.7% and 23.8% for the 1998 and 1999 periods,
respectively. Product development expenses increased by $979,000 to $1,216,000
during the six-month period ended March 31, 1999 from $237,000 during the
six-month period ended March 31, 1998 and were 10.4% and 22.0% as a percentage
of software license fees, respectively. In accordance with SFAS Number 86, the
Company capitalizes the cost of development of software products that have
reached the level of technological feasibility. The Company's ACID product fell
into this category during both of the three-month and six-month periods ended
March 31, 1998, resulting in capitalization of $123,000 and $248,000 of
development costs, respectively. Development of the Company's Vegas product
reached the beta stage in March 1999 resulting in capitalization of $102,000
during the quarter ended March 31, 1999. The addition of software engineers to
accelerate development of the Company's expanding line of software products
caused the remaining increase in product development costs between the two
periods.


Income Tax Expense (Benefit)

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

See accompanying notes.

                                       12
<PAGE>
 
Liquidity and Capital Resources

Cash was used in operating activities of $764,000 and $3,846,000 for the
six-month periods ended March 31, 1998 and 1999, respectively. A loss of
$706,000 was the primary factor in the use of cash during the 1998 period. The
ACID product launch contributed to a loss and use of cash, of $2,889,000 in
1999. Additional investments in accounts receivable, inventory and other assets
of $580,000 and $1,349,000 also impacted cash used in operations for the
six-month periods ended March 31, 1998 and 1999, respectively. Cash invested in
such assets for the six-month periods ended March 31, 1998 were partially offset
by additional credit obtained from trade creditors of $364,000. The impact of
noncash charges such as depreciation, amortization, issuance of common stock
warrants and deferred tax charges for the six-month periods ended March 31, 1998
and 1999 totaled $158,000 and $413,000, respectively.

Cash provided by (used in) investing activities of ($439,000) and $2,281,000 for
the six-month periods ended March 31, 1998 and 1999, respectively, included net
purchases of fixed assets of $190,000 and $617,000, respectively. Leasehold
expenditures for the company's administrative and engineering offices in 1998
and purchases of computers, furniture and other assets were the primary fixed
asset additions. Investing activities also included capitalized software
development efforts of $248,000 and $102,000 for the six-month periods ended
March 31, 1998 and 1999, respectively. The primary generator of cash provided by
investing activities in the six months ended March 31, 1999 were the proceeds
from the sale of marketable securities of $3,000,000.

Cash provided by financing activities of $1,283,000 and $12,000 for the
six-month periods ended March 31, 1998 and 1999, were impacted by proceeds from
debt of $1,022,000 and $632,000, respectively and from payments on debt of
$241,000 and $620,000, respectively. The 1998 period was also impacted by the
issuance of $656,000 of common stock and partially offset by $153,000 of advance
payments toward the initial public offering completed in June 1998.

In February 1997, the Company entered into a $620,000 construction loan with a
bank to fund the purchase and renovation of a 10,000 square foot facility to
house the Company's expanded operations. On January 8, 1998, the Company
converted the construction loan into a term loan due January 3, 2003. The loan
was paid in full in October 1998.

The Company received the proceeds of a $40,000 unsecured note in August 1997
from relatives of a Company officer. The note paid interest monthly at 15% per
annum and was convertible into Common Stock at $5.00 per share at the election
of the Company. The Company exercised its right and converted the note into
8,000 shares of Common Stock in October 1997.

See accompanying notes.

                                       13
<PAGE>
 
In June 1998, the Company completed an initial public offering, including over
allotment shares, of 2,097,775 shares of common stock at a price of $7.50 per
share and 1,145,387 common stock purchase warrants at a price of $0.10 each. The
net proceeds to the Company from the offering, after deduction of underwriting
discounts and other expenses relating to the offering, were approximately
$13,258,359. The Company is using and intends to continue using the net proceeds
for development of new products, capital expenditures, sales and marketing,
expansion of internal operations, acquisition activities and/or joint venture
activities and working capital and general corporate purposes.

In March 1999, the Company received the proceeds from a mortgage with a bank on
its sales and marketing facility of $632,000. The agreement provides for monthly
payments of interest and principal of $5,050 based on an interest rate of 7.375%
percent per annum. Simultaneously, the Company entered into a back-up revolving
line of credit agreement. The agreement allows for maximum borrowings of
$5,000,000 or a lesser amount based on the level of customer accounts receivable
and inventory acceptable to the bank. The agreement, if drawn upon, would
require monthly interest payments calculated at a rate equal to the 30 day
London Interbank Offer (LIBOR) plus 2.25%, initially 7.19% per annum. Principal
amounts are due January 31, 2000. For advances to be available, the Company must
maintain certain financial covenants including minimum tangible net worth,
current and debt ratios, as well as restrictions on the level of capital
acquisitions, payment of dividends, issuance of additional indebtedness and
others.

Although the Company has no substantial commitments for capital expenditures,
management anticipates there will be a need for increased capital expenditures
and lease commitments in the next 12 months consistent with the anticipated
growth in operations and infrastructure.

The Company has significantly increased its operating expenses since its
inception and expects the need for significant investment in marketing and other
support staff and associated costs to continue. Management believes that the net
proceeds of the initial public offering completed in June 1998, its revolving
credit facility and cash provided by operations will enable the Company to meet
its operational and capital requirements for at least the next 12 months.


Year 2000 Impact

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Year 2000 issue creates risk for the Company from
unforeseen problems in its own computer systems and from third parties,
including customers, vendors, and manufacturers, with whom the Company deals.
Failures of the Company's and/or third

See accompanying notes.

                                       14
<PAGE>
 
parties' computer systems could have a material impact on the Company's ability
to conduct its business.

The Company believes its software products are year 2000 compliant. The
Company's products obtain date information, such as creation dates and
modification dates, directly from the computer's operating system. Microsoft
Corporation has stated that their operating systems will continue to operate
into the twenty-first century.

With regard to the Company's internal processing and operational systems, the
Company has designed a Year 2000 readiness plan including the following steps:
(i) conducting an inventory of the Company's internal systems, including
information technology systems and non-information technology and the systems
acquired or to be acquired by the Company from third parties; (ii) assessing and
prioritizing any required remediation; (iii) remediating any problems by
repairing or, if appropriate, replacing the non-compliant systems; (iv) testing
of all remediated systems for Year 2000 compliance; and (v) developing
contingency plans that may be employed in the event that any system used by the
Company is unexpectedly affected by an unanticipated Year 2000 problem. The
Company has completed the inventory and assessment phases of this plan. Although
the Company has not discovered any material operational issues or costs
associated with preparing internal systems for the Year 2000, there can be no
assurance that the Company will not experience material adverse effects from
undetected errors or the failure of such systems to be Year 2000 compliant. Any
such failures could have a material adverse effect on the Company's business,
financial condition and results of operations.

In addition to assessing its own systems, the Company has reviewed its
dependence on its vendors, service providers and third party business partners.
The Company believes there are numerous sources and alternatives to vendors for
which it relies on for products or services. Further, no customer accounts for
more than 10% of the Company's revenues. Despite the Company's lack of
dependence, there can be no guarantee that the Company will not be adversely
impacted by non-compliance of one or more vendors, service providers or
customers. The actual impact on the Company resulting from non-compliance of
these entities cannot be determined at this time.

To date, the Company has expended an immaterial amount in conjunction with its
Year 2000 readiness plan. The Company further expects that the cost of
completing the Year 2000 readiness plan, including replacement of any necessary
computer systems, will not be material.

See accompanying notes.

                                       15
<PAGE>
 
                           PART II - OTHER INFORMATION
ITEM

1.   Legal Proceedings

     On March 23, 1999, the Company received a letter alleging the Company's
     Sound Forge XP product infringes the Patent rights of a company in the
     telephony industry. The Company believes it holds full right and title to
     the technology included within its Sound Forge XP product and that, in any
     event, the claim alleges an infringement only within the telephony industry
     which represents a relatively minor portion of the Company's product base.

2.   Changes in Securities

     (a)      None
     (b)      None
     (c)      None
     (d)      The information in this paragraph 2(d) relates to the
              registrant's  Registration  Statement on Form SB-2, Registration
              No. 333-46005 (the "Registration  Statement").  The managing
              underwriters for the offering of the securities sold pursuant to
              the Registration  Statement (the Offering) were Dirks & Company,
              Inc. and Security  Capital  Trading,  Inc. (the  Underwriters).
              The Offering  commenced on April 22, 1998, and was completed on
              June 10,  1998,  following  the  Underwriters'  partial  exercise
              of their option to purchase shares of stock and warrants to cover
              over allotments  (the  Over-Allotment  Option).  The following
              chart sets forth the securities  sold pursuant to the Offering,
              the offering  price and the aggregate  offering price of the
              amount sold.
<TABLE>
<CAPTION>
                                                               Offering
                          Security             Amount Sold      Price           Amount
                          --------             -----------     --------         ------
         <S>                                     <C>             <C>        <C>
         Common Stock                            2,097,775       $7.50      $15,733,312.50
         Warrants                                1,145,387        0.10          114,538.70
                                                                            --------------
         Total                                                              $15,847,851.20

         Expenses of Offering:
         Underwriting Discount                                               $1,378,763.05
         Underwriting    Non-Accountable
         Expense Allowance                                                      475,435.54
         Other Expenses                                                         735,294.00
                                                                            --------------
         Net Proceeds                                                       $13,258,358.61
                                                                            --------------
</TABLE>

                                       16
<PAGE>
 
Use of Proceeds

From the effective date of the Registration Statement through March 31, 1999,
the Company applied an aggregate of $1,600,000 toward repayment of indebtedness,
$2,011,000 towards facility and other capital expenditures and $4,456,000 toward
product development, selling and marketing, expansion of internal operations,
working capital and general corporate purposes. The Company believes that none
of the proceeds were paid, directly or indirectly, to (i) directors or officers
of the Company or their affiliates, (ii) persons owning ten percent or more of
the common stock or (iii) affiliates of the Company. To date, the Company
believes that it has used the net proceeds of the Offering in a manner
consistent with the use of proceeds described in the Registration Statement and
the Prospectus dated April 22, 1998. The remaining net proceeds of the Offering
in the amount of $5,191,000 have been invested in cash and cash equivalents.

3.   Defaults upon Senior Securities - None

4.   Submission of Matters to a vote of Security Holders

At the Annual Meeting of Stockholders held on March 10, 1999, a quorum,
consisting of approximately 90% of the Company's common and preferred stock
outstanding and entitled to vote at the meeting, was present in person or by
proxy. At the meeting, the following proposals were approved by the
stockholders: Proposal #1 David C. Kleinman was re-elected as a Class one
Director; Proposal #2 Adoption of the 1995 Stock Option Plan and the options
granted thereunder was ratified; Proposal #3 Adoption of the Non-Employee
Directors Stock Option Plan and the options granted thereunder was ratified; and
Proposal #4 Appointment of Ernst & Young LLP as independent auditors of the
Company for the fiscal year ending September 30, 1999 was ratified.

                        FOR                 WITHHELD
                        ---                 --------
Proposal #1          9,311,949               16,425

                        FOR                 AGAINST          ABSTAIN
                        ---                 -------          -------
Proposal #2          8,031,208              111,390           10,360
Proposal #3          8,058,068               85,780            9,110
Proposal #4          9,289,584               35,800            2,990


Rimas Buinevicius, Monty Schmidt, Curtis Palmer, Frederick Kopko and Arnold
Pollard continued as directors following the meeting.

5.   Other Information - None
6.   Exhibits and Reports on Form 8-k
     (a)      Exhibit (see exhibit list)
     (b)      Reports on Form 8-k - None

                                       17
<PAGE>
 
ITEM 6(a)         EXHIBIT LIST

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

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

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

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

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

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

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

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

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

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

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

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

                                       18
<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.

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

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

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

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

10.13    Commercial Lease between Registrant and Seven J's, Inc. regarding 627
         Williamson Street, Madison, Wisconsin dated March 26, 1999.

10.14    Loan Agreement, dated March 3, 1999 between Registrant and Associated
         Bank South Central.

10.15    Business Note Agreement, dated March 3, 1999 between Registrant and
         Associated Bank South Central.

27.1     Financial Data Schedule



                                       19
<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, 1999                            By:      /s/ Rimas P. Buinevicius
                                                 ----------------------------
                                                 Rimas P. Buinevicius
                                                 Chairman and Chief Executive 
                                                  Officer

May 14, 1999                            By:      /s/ Kenneth A. Minor
                                                 ----------------------------
                                                 Kenneth A. Minor
                                                 Chief Financial Officer

May 14, 1999                            By:      /s/ Frederick Kopko
                                                 ----------------------------
                                                 Frederick Kopko
                                                 Secretary


                                       20