<PAGE>

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

                                    FORM 10-Q

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

For the Quarterly period ended December 31, 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                                  February 12, 2002
                 -----                                  -----------------
        Common Stock, $0.01 par value                       26,754,111

<PAGE>

                              SONIC FOUNDRY, INC.
                         QUARTERLY REPORT ON FORM 10-Q
                        QUARTER ENDED DECEMBER 31, 2001

                                TABLE OF CONTENTS

                                                                        PAGE NO.
                                                                        --------

PART I  FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

        Consolidated Statements of Operations (Unaudited) -
         Three-months ended December 31, 2001 and 2000........................ 5

        Consolidated Statements of Cash Flows (Unaudited) -
         Three-months ended December 31, 2001 and 2000........................ 6

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

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations...................................11

Item 3. Quantitative and Qualitative Disclosures
        About Market Risk.....................................................18

PART II OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds.............................19

Item 6. Exhibits and Reports on Form 8-K......................................20

                                       2

<PAGE>

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

<TABLE>
<CAPTION>
                                                                         December 31,        September 30,
                                                                             2001                2001
                                                                         ---------------------------------
<S>                                                                      <C>                <C>
 Assets                                                                  (Unaudited)
 Current assets:
   Cash and cash equivalents                                               $  4,124            $ 7,809
   Restricted cash                                                            1,000                  -
   Accounts receivable, net of allowances of $1,081 and $1,075                4,312              4,065
    Accounts receivable, other                                                   41                 26
    Inventories                                                                 903              1,118
    Prepaid expenses and other current assets                                   742              1,085
                                                                         ---------------------------------
 Total current assets                                                        11,122             14,103

 Property and equipment:
    Buildings and improvements                                                2,406              2,409
    Equipment                                                                13,993             13,823
    Furniture and fixtures                                                      541                542
    Assets held for sale                                                         40                 40
                                                                         ---------------------------------
      Total property and equipment                                           16,980             16,814
    Less accumulated depreciation                                             5,865              5,010
                                                                         ---------------------------------
 Net property and equipment                                                  11,115             11,804

 Other assets:
    Goodwill and other intangibles, net                                       9,124             44,732
    Capitalized software development costs, net                                  18                 73
    Long-term investment                                                        514                514
    Other assets                                                                 35                457
                                                                         ---------------------------------
 Total other assets                                                           9,691             45,776
                                                                         ---------------------------------
 Total assets                                                              $ 31,928            $71,683
                                                                         =================================
</TABLE>

See accompanying notes.
                                       3

<PAGE>

                               Sonic Foundry, Inc.
                           Consolidated Balance Sheets
                      (in thousands except for share data)
<TABLE>
<CAPTION>
                                                                            December 31,     September 30,
                                                                                2001             2001
                                                                            ------------------------------
<S>                                                                         <C>              <C>
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                                           $3,338            $2,316
   Unearned revenue                                                               71                83
   Accrued liabilities                                                         3,234             1,719
   Accrued restructuring charges                                                 267               345
   Current portion of long-term debt                                           3,989             4,003
   Current portion of capital lease obligations                                1,213             1,216
                                                                            ---------------------------
Total current liabilities                                                     12,112             9,682

   Long-term obligations, net of current portion                                 184               217
   Capital lease obligations, net of current portion                             376               525
   Other liabilities                                                              28                28

Stockholders' equity
   Preferred stock, $.01 par value, authorized 5,000,000 shares, none
     issued and outstanding                                                       -                 -
   5% preferred stock, Series B, voting, cumulative,
     convertible, $.01 par value (liquidation preference at
     par), authorized 10,000,000 shares, none issued and
     outstanding                                                                  -                 -
   Common stock, $.01 par value, authorized 100,000,000
     shares; 26,363,283 and 22,345,503 shares issued and
     26,335,533 and 22,317,753 outstanding at December 31, 2001 and
     December 31, 2001 and September 30, 2001                                    264               223
   Common stock to be issued                                                   4,900             5,375
   Additional paid-in capital                                                154,064           148,188
   Accumulated deficit                                                      (139,598)          (92,248)
   Receivable for common stock issued                                            (26)              (34)
   Cumulative foreign currency translations/adjustments                           (5)                7
   Unearned compensation                                                        (221)             (130)
   Treasury stock, at cost, 27,750 shares                                       (150)             (150)
                                                                            --------------------------
Total stockholders' equity                                                    19,228            61,231
                                                                            --------------------------
Total liabilities and stockholders' equity                                   $31,928           $71,683
                                                                            ==========================
</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
                                                                                 December 31,
                                                                          2001                 2000
                                                                        -----------------------------
<S>                                                                     <C>                  <C>
Revenue:
   Software                                                             $  3,553             $  3,988
   Media services                                                          2,347                2,530
   Media systems                                                             138                    -
                                                                        -----------------------------
     Total revenue                                                         6,038                6,518

Cost of revenue:
   Cost of software                                                          963                1,404
   Cost of media services                                                  1,777                2,333
   Cost of media systems                                                      36                    -
                                                                        -----------------------------
     Total cost of revenues                                                2,776                3,737
                                                                        -----------------------------
     Gross profit                                                          3,262                2,781

Operating expenses:
   Selling and marketing expenses                                          2,401                5,228
   General and administrative expenses                                     1,601                3,684
   Product development expenses                                            1,847                2,834
   Amortization of goodwill and
     other intangibles                                                         -                7,018
   Restructuring charges                                                       -                3,782
                                                                        -----------------------------
     Total operating expenses                                              5,849               22,546
                                                                        -----------------------------
     Loss from operations                                                  2,587)             (19,765)

Other income (expense):
   Interest expense                                                          (35)                (187)
   Interest and other income                                                   4                  279
                                                                        -----------------------------
     Total other income (expense)                                            (31)                  92
                                                                        -----------------------------
   Loss before cumulative effect of changes in accounting principle       (2,618)             (19,673)
   Cumulative effect of changes in accounting principle                  (44,732)                   -
                                                                        -----------------------------
Net loss                                                                $(47,350)            $(19,673)
                                                                        =============================

Loss per common share:
   Loss before cumulative effect of changes in accounting principle     $  (0.10)            $  (0.90)
   Cumulative effect of changes in accounting principle                    (1.74)                   -
                                                                         ----------------------------
     Net loss per common share -  basic and diluted                     $  (1.84)            $  (0.90)
                                                                         ============================
</TABLE>

See accompanying notes.

                                       5

<PAGE>

                               Sonic Foundry, Inc.
                      Consolidated Statements of Cash Flows
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                   Three months ended
                                                                                      December 31,
                                                                                  2001              2000
                                                                                -------------------------
<S>                                                                             <C>              <C>
Operating activities
Net loss                                                                        $(47,350)        $(19,673)
Adjustments to reconcile net loss to net cash used in operating activities:
   Cumulative effect of change in accounting principle                            44,732                -
   Amortization of goodwill and other intangibles                                      -            7,018
   Depreciation and amortization of property and equipment                           862              860
   Amortization of capitalized software development                                   55              123
   Noncash charge for common stock warrants and options                              143               12
   Loss on sale of assets and investments, including estimated loss on
     assets held for sale                                                              4              618
   Changes in operating assets and liabilities:
     Accounts receivable                                                            (254)             901
     Inventories                                                                     215             (242)
     Prepaid expenses and other assets                                               394              365
     Accounts payable and accrued liabilities                                       (637)           2,267
                                                                                -------------------------
Total adjustments                                                                 45,514           11,922
                                                                                -------------------------
Net cash used in operating activities                                             (1,836)          (7,751)

Investing activities
Acquisition, net of cash acquired                                                   (435)            (453)
Purchases of property and equipment                                                 (171)            (488)
                                                                                -------------------------
Net cash used in investing activities                                               (606)            (941)

Financing activities
Proceeds from sale of common stock, net of issuance costs                            152               93
Payments on long-term debt and capital leases                                       (384)            (419)
Cash placed in escrow                                                             (1,000)               -
                                                                                -------------------------
Net cash used in financing activities                                             (1,232)            (326)
Effect of exchange rate changes on cash                                              (11)               -
                                                                                -------------------------

Net decrease in cash                                                              (3,685)          (9,018)
Cash and cash equivalents at beginning of period                                   7,809           21,948
                                                                                -------------------------
Cash and cash equivalents at end of period                                      $  4,124        $  12,930
                                                                                =========================

Supplemental cash flow information:
   Interest paid                                                                $     35        $      97
Noncash transactions -
   Capital lease acquisitions                                                         16                -
     Reclassification of goodwill to fixed assets upon final
       appraisal of International Image                                                -            1,281
     Cancellation of unvested stock options classified as Unearned
       compensation upon acquisition of STV                                            -            1,249
     Issuance of options for deferred compensation plan                              104                -
     Issuance of warrants for consulting services                                     49               19
     Conversion of exchangeable stock into common stock                              475                -
     Issuance of common stock and stock options for MediaSite                      5,016                -
</TABLE>

See accompanying notes.

                                       6

<PAGE>


                              Sonic Foundry, Inc.
                   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, 2001. In the
opinion of management, all adjustments (consisting only of adjustments of a
normal and recurring nature) considered necessary for a fair presentation of the
results of operations have been included. Operating results for the three-month
period ended December 31, 2001 are not necessarily indicative of the results
that might be expected for the year ended September 30, 2002.

Inventories

Inventory consists of the following (in thousands):

<TABLE>
<CAPTION>
                                 December 31,        September 30,
                                     2001                2001
                               ------------------------------------
<S>                            <C>                   <C>
Raw materials and supplies           $246               $  390
Work-in-process                        97                  112
Finished goods                        560                  616
                               ------------------------------------
                                     $903               $1,118
                               ====================================
</TABLE>

Net Loss Per Share

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

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                            December 31,
                                                        2001             2000
                                                     ---------------------------
<S>                                                  <C>              <C>
Denominator
Denominator for basic and diluted loss per share
  - weighted average common shares                   25,676,862       21,881,085
                                                     ===========================

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, warrants and exchangeable shares        2,204,194        1,220,462
</TABLE>

                                       7

<PAGE>

Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. FAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company expects to adopt FAS 144 as of October 1, 2002. It does not expect that
the adoption of the Statement will have a significant impact, if any, on the
Company's financial position and results of operations.

     Effective October 1, 2001, the Company adopted Statement of Financial
     Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under
     SFAS No. 142, goodwill is no longer amortized but reviewed for impairment
     annually, or more frequently if certain indicators arise. The Company is
     required to complete the initial step of a transitional impairment test
     within six months of adoption of SFAS No. 142. During the first quarter of
     2002 the Company retained an outside valuation firm to assist in the
     completion of the transitional impairment test. It was determined that the
     remaining goodwill of the media services reporting unit associated with the
     acquisitions of STV and International Image was entirely impaired, which
     resulted in a $44,732,000 charge reflected as a cumulative effect of
     changes in accounting principle. Subsequent impairment charges for
     MediaSite or other acquisitions, if any, will be reflected as an operating
     expense in the income statement. Had the Company been accounting for its
     goodwill under SFAS No. 142 for all periods presented, the Company's net
     income and earnings per share would have been as follows:

<TABLE>
<CAPTION>
(in thousands, except per share data)          Three months ended December 31,
                                                 2001               2000
                                               ---------------------------------
<S>                                            <C>                <C>
Reported net loss                              $(47,350)          $(19,673)
Add back cumulative effect of changes in
  accounting principle                           44,732                  -
Add back goodwill amortization                        -              7,018
                                               ---------------------------------
   Adjusted net loss                           $ (2,618)          $(12,655)
                                               =================================

Basic and diluted - net loss per share
  Reported net loss per share
                                               $  (1.84)          $  (0.90)
  Cumulative effect of changes in accounting
    principle                                      1.74                  -
  Goodwill amortization                               -               0.32
                                               ---------------------------------
    Adjusted net loss per share                $  (0.10)          $  (0.58)
                                               =================================
</TABLE>

                                       8

<PAGE>

2.   Restructuring Charge

As a result of rapidly changing market conditions, in December 2000 the
Company's Board of Directors authorized management to make a 40% workforce
reduction 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. In the fourth quarter of fiscal 2001, the Company recorded a
non-cash charge of $1,000,000 for impairment in value of Internet advertising
credits. Also, the Company refined the estimated value of equipment no longer
necessary in operations that was identified in the December 2000 restructuring
plan, which resulted in an additional charge of $1,191,000. The accrual balance
of $345,000 at September 30, 2001 was reduced by $78,000 in the quarter ended
December 31, 2001.

<TABLE>
<CAPTION>

(in thousands)                                  Severance and      Lease    Fixed asset    Prepaid
                                               Related Charges Terminations  Disposals   Advertising    Other       Total
                                               --------------- ------------  ---------   -----------    -----       -----
<S>                                           <C>             <C>            <C>        <C>          <C>         <C>
Charge in December 2000                           $ 1,470          $ 1,555      $   594   $   --       $ 163       $ 3,782
Charge in September 2001                              --               --         1,191     1,000        -           2,191
                                               ---------------------------------------------------------------------------
  Total charges                                     1,470            1,555        1,785     1,000        163         5,973
Adjustments to December 2000 charge                   --              (503)         503       --          --           --
Amount paid                                        (1,470)            (707)          --       --          (2)       (2,179)
Non-cash charges                                      --                --       (2,288)   (1,000)      (161)       (3,449)
                                               ---------------------------------------------------------------------------
  Accrued liabilities at September 30, 2001           --               345          --        --          --           345
Amount paid in Q1-2002                                --               (78)         --        --          --           (78)
                                               ---------------------------------------------------------------------------
                                                  $   --           $   267      $   --    $   --       $  --       $   267
                                               ===========================================================================
</TABLE>


3.   Contingencies

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

4.   Acquisitions

On October 15, 2001, the Company completed the asset purchase of MediaSite,
Inc., a pioneer in providing automated rich media publishing, management and
access solutions. Under terms of the purchase agreement, a wholly-owned
subsidiary of the Company purchased the majority of


                                       9


<PAGE>

the assets of MediaSite and assumed certain of its liabilities in exchange for
3,880,000 shares of the Company's common stock and 300,000 warrants valued at
$1.20 per share. Also as part of the purchase, the Company capitalized $490,000
in closing costs, $3,101,000 in assumed liabilities and a $365,000 advance that
was issued to MediaSite in September 2001. Approximately $9,100,000 of
intangible assets resulted from the acquisition. The Company is awaiting results
of an independent appraisal, which will determine the types of intangible assets
that exist. If this appraisal indicates that a portion of the purchase price
relates to in-process research and development, the Company may need to record
an expense in the second quarter of 2002. In accordance with SFAS No. 142, any
goodwill associated with the MediaSite purchase will not be amortized, but will
be reviewed annually for impairment.

5.   Subsequent Events

On February 7, 2002 the Company announced that its media services division had
signed a definitive agreement to acquire all the intellectual property rights to
Media Taxi (TM) from Los Angeles based Digital Savant, Inc. in exchange for
$100,000 and 221,000 shares of the Company's common stock. Media Taxi is a
widely deployed browser-based media asset management system focused on
streamlining and reducing the cost of managing and distributing marketing and
publicity materials for the entertainment industry.

In February 2002 the company completed a $7.13 million offering of convertible
subordinated debt with certain investors, including several institutional
holder. The debt carries interest at 10% per annum and is convertible into
shares of common stock at a fixed rate of $2.45, subject to certain anti
dilution adjustments. The investors also received warrants to purchase 1,163,000
shares of common stock with a strike price of $2.94 per share.

                                       10


<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, 2001. In addition to historical information, this discussion
contains forward-looking statements such as statements of the Company's
expectations, plans, objectives and beliefs. These statements use such words as
"may," "will," "expect," "anticipate," "believe," "plan," and other similar
terminology. Actual results could differ materially due to changes in the market
acceptance of our products, market introduction or product development delays,
our ability to effectively integrate acquired businesses, global and local
business conditions, legislation and governmental regulations, competition, our
ability to effectively maintain and update our product portfolio, shifts in
technology, political or economic instability in local markets, and currency and
exchange rate fluctuations.


Overview

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

Sonic Foundry Media Software develops sophisticated software tools for the
creation, editing and publishing of digital multimedia. Production professionals
use its Sound Forge(R), ACID(TM), Vegas(R) Video and Vegas(R) Audio tools
worldwide for everything from audio and video creation to non-linear digital
video editing and streaming media development.

Sonic Foundry Media Services is a leading supplier of digitization, management
and delivery solutions for various industries, with emphasis placed on services
for the entertainment sector. These services consist of conversion, reformatting
and encoding of television, film and audio content for multiple delivery
platforms. Serving as the link between content and customers, the services
enable media delivery through existing and emerging distribution channels.

Sonic Foundry Media Systems (formerly MediaSite) provides customized development
of automated rich-media applications and scalable solutions that allow media and
entertainment companies, as well as enterprises and government organizations, to
deploy, manage and distribute video content on IP-based networks.

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

                                       11


<PAGE>

Critical Accounting Policies - Disclosure

Allowance for doubtful accounts

It is our policy to review the accounts receivable aging each month and
specifically reserve for balances that have been identified as potential risks.
We identify potential risks through deviations from historical payment trends,
the age of the account and ongoing communications with our customers by both the
accounts receivable and sales departments.

Reserve for returns

It is our policy to review each month historical rates of return as well as
industry, product and customer data. We use this data to develop estimates for
products that may be returned in the future and reserve accordingly.

Reserve for inventory

It is our policy to review the inventory listing each month and reserve for
products that have been discontinued, have newer versions available for sale or
have quantities in excess of foreseeable sales.

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 December 31,
                                                     2001              2000
                                                --------------------------------
<S>                                             <C>      <C>       <C>      <C>
     Software license fees                      $3,553   100%      $3,988   100%
     Cost of software license fees                 963    27        1,404    35
                                                --------------------------------
       Gross margin-software license fees       $2,590    73%      $2,584    65%


     Media services                             $2,347   100%      $2,530   100%
     Cost of media services                      1,777    76        2,333    92
                                                --------------------------------
       Gross margin-media services              $  570    24%      $  197     8%


     Media systems                              $  138   100%          -
     Cost of media systems                          36    26           -
                                                --------------------------------
       Gross margin-media systems               $  102    74%          -
</TABLE>

Total Net Revenue

Three months ended December 31, 2001 ("Q1-2002") compared with the three months
ended December 31, 2000 ("Q1-2001")

Total net revenues declined $480 or 7% to $6,038 in Q1-2002 from $6,518 in
Q1-2001. Revenue from software declined 11% while services revenue declined 7%.
Offsetting this decline was the newly established systems group, which
contributed 2% of total revenue.

Net revenues from international customers accounted for 21% and 25% of total net
revenues for the three-month periods ended December 31, 2001 and 2000,
respectively.

                                       12

<PAGE>

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, 2001.

Revenue from Software License Fees

Revenues from software license fees consist of fees charged for the licensing of
Windows based software products. The Company's primary focus is on the platforms
of ACID, Sound Forge and Vegas. 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.

                           Q1-2002 compared to Q1-2001

Net revenues from software license fees declined $435 or 11% from Q1-2001 to
Q1-2002. This net change resulted from the following items:

     .     Revenue from the retail channel declined $884 or 34%. The continued
           uncertainty in the retail market primarily impacted sales of ACID,
           which declined 21%. The discontinuance of Siren, which contributed 7%
           of total software revenue in Q1-2001, was also a factor in the retail
           decline.

     .     Revenue from the OEM channel declined $232 or 49%. Along with
           traditional license fees from OEM partners, current quarter revenues
           also include consulting fees for custom software development.

     .     Revenue from the direct channel increased $682 or 75%. The majority
           of this growth has been through downloads, which were 51% of direct
           sales in Q1-2002 versus only 45% in Q1-2001. The release of Vegas
           Video 3.0 late in Q1-2002 helped drive the increase as well as
           ongoing email and catalog campaigns.

Gross Margin from Software License Fees

Gross margin improved to 73% in Q1-2002 versus 65% in Q1-2001. While revenue
from software license fees declined 11%, cost of software license fees improved
to 27% in Q1-2002 of software license fees compared to 35% in Q1-2001. Included
in costs of software license fees are product material costs, assembly labor,
freight, royalties on third party technology or intellectual content, and
amortization of previously capitalized product development and localization
costs. The net change in gross margin was related to a decrease in direct
material costs resulting from an increase in sales through the direct channel.
This was slightly offset by an increase in royalties paid to third parties,
which was driven by the increase in ACID loop sales and a one-time write-off of
MPEG licenses as a result of a contract termination.

                                       13


<PAGE>

Revenue from Media Services

Revenue from media services includes tape duplication for broadcast
distribution, broadcast standard conversions, audio and video encoding, as well
as fees for consulting services. Revenue from media services declined $183, or
7%, from Q1-2001 to Q1-2002. While revenues from the core services of
distribution and conversion remained flat, revenue from audio and video encoding
has decreased significantly and accounted for much of the decline. Audio
encoding only contributed $17 to Q1-2002 service revenue. The Company has
de-emphasized audio encoding services since January 2001 and will no longer
provide it as a service effective March 1, 2002. This will not involve any
employee terminations, however, certain production equipment will no longer be
required, resulting in an anticipated improvement in margins going forward. The
Company will discontinue depreciating the yet-to-be identified equipment on
March 1, 2002. Upon identification, the Company will reclassify the net
realizable value of the equipment to Assets Held for Sale and record an
anticipated loss.

Revenues from the newly acquired Media Taxi technology from Digital Savant will
be added to the services offering beginning in February 2002.


Gross Margin from Media Services

Gross margin from media services improved significantly to 24% in Q1-2002 from
8% in Q1-2001. Costs of media services have become relatively stable and fixed
in dollars since the Company's restructuring in Q1-2001, which included the
elimination of duplicate positions, operational and process improvements, a
switch to a temporary labor force for encoding services and a reduction in
depreciation expense from the write-off and disposal of underutilized leased
assets no longer needed for the service business. Current costs of media
services include tape costs, compensation, benefits and other expenses
associated with production personnel, depreciation on production equipment and
an allocation for general and administrative expenses such as facility costs. As
a result of the termination of the audio encoding business, depreciation expense
will be reduced by $28 per month beginning March 1, 2002.

While the allocation of the Digital Savant purchase is not yet complete, we
expect that a portion of the price will be allocated to an intangible asset that
will be amortized against cost of services in future periods.


Operating Expenses

The following chart is provided to add clarification by presenting items as a
percentage of total revenues. For comparison purposes, amortization of goodwill
has been excluded from the 2000 results due to the adoption of SFAS No. 142.
Please see Note 1 of the financial statements for further details. This should
be read in conjunction with the unaudited consolidated financial statements
presented in this filing.

                                       14


<PAGE>

                                                        Three Months Ended
                                                            December 31,
                                                        2001             2000
                                                    ----------------------------
     Total revenues                                     100%             100%
     Cost of revenues                                    46               57
                                                    ----------------------------
       Gross margin                                      54               43

     Operating expenses
       Selling and marketing expenses                    40               80
       General and administrative expenses               26               57
       Product development expenses                      31               43
       Restructuring charges                              -               58
                                                    ----------------------------
           Total operating expenses                      97              238
                                                    ----------------------------
           Loss from operations                         (43)%           (195)%
                                                    ============================

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 our products, services and systems. Timing of these
costs may vary greatly depending on introduction of new offerings and entrance
into new markets.

                           Q1-2002 compared to Q1-2001

Selling and marketing expenses declined by $2,827 or 54%, to $2,401 in Q1-2002
from $5,228 in Q1-2001. This decrease can be attributed to the restructuring in
Q1-2001, which resulted in significant staff reductions and a lesser focus on
more costly brand marketing such as tradeshows and media advertising. The
continued focus on the direct channel for software sales has also resulted in
reduced spending on co-operative marketing in the consumer retail channel.

Selling and marketing expenses increased from Q4-2001 levels, partially due to
the acquisition of MediaSite sales personnel and the marketing efforts necessary
to promote our new systems offerings. Going forward we anticipate selling and
marketing expenses to remain at the current level through this fiscal year as we
focus efforts on the systems group.


General and Administrative Expenses

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

                                       15


<PAGE>

                           Q1-2002 compared to Q1-2001

G&A expenses declined by $2,083 or 57%, to $1,601 in Q1-2002 from $3,684 in
Q1-2001. The elimination of non-recurring, integration related expenses and
elements of the Q1-2001 restructuring plan, including removal of duplicate
functions through staff reductions and consolidation of facilities have greatly
improved our efficiencies. The addition of MediaSite's Pittsburgh facility had
minimal impact on G&A expenses. Likewise, the addition of Media Taxi is expected
to have little or no impact on future G&A expenses.

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."

                           Q1-2002 compared to Q1-2001

Product development expenses declined by $987, or 35%, to $1,847 in Q1-2002 from
$2,834 in Q1-2001. The decrease 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 and
then amortizes that cost over the anticipated life of the product. No
development costs for our core product line were capitalized during fiscal 2001
or the current quarter. Amortization of capitalized software development was $55
in Q1-2002 and relates to Viscosity, which was a result of the Jedor acquisition
in February 2000. Viscosity will be fully amortized in January 2002.

Product development spending increased slightly over the quarter ended September
2001 due to the recent acquisition of MediaSite software developers. Going
forward we anticipate spending for research and development to remain relatively
stable and we believe software development costs qualifying for capitalization
will continue to be insignificant, 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, the restructuring charge primarily consisted of: 1) an
accrual for 60 days of severance and benefits for domestic employees terminated
on December 20, 2000 as well as severance and other expenses associated with
closing our office in the Netherlands; 2) an asset impairment charge related to
the sale, disposal or write-down of PCs, office equipment and other assets no
longer required; 3) operating and

                                       16



<PAGE>

lease termination costs related to the consolidation of facilities; and 4)
miscellaneous charges such as forfeited tradeshow deposits.

Cumulative Effect of Changes in Accounting Principle

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

Liquidity and Capital Resources

Cash used in operating activities was $1,836 in Q1-2002 compared to $7,751 in
Q1-2001. Decreased use of operating cash of $5,915 consisted primarily of
operating cost reductions identified in the Q1-2001 restructuring. Contributing
to the net change were the following items; 1) Loss from operations before
amortization of goodwill and restructuring charges improved from $8,965 in
Q1-2001 to $2,587 in Q1-2002, 2) Reduced inventory balances due to increases in
the electronic delivery of our software products and 3) An increase in accounts
payable and accrued liabilities due primarily to the new media systems reporting
unit.

Cash used in investing activities was $606 in Q1-2002 compared to $941 in
Q1-2001. The $335 decline is primarily attributed to fewer investments in
property and equipment. Investing activities in the current quarter also
included legal, professional and other closing costs associated with the
MediaSite acquisition.

Cash used in financing activities was $1,232 in Q1-2002 compared to $326 in
Q1-2001. The primary change was for the funding of an escrow account treated as
restricted cash. In October 2001, the Company deposited $1,000 with the Ontario
Superior Court of Justice to be held in trust until settlement of a lawsuit with
the former shareholders of International Image.

Recent Developments Impacting Liquidity

In February 2002 the company completed a $7.13 million offering of convertible
subordinated debt with certain investors, including several institutional
holder. The debt carries interest at 10% per annum and is convertible into
shares of common stock at a fixed rate of $2.45, subject to certain anti
dilution adjustments. The investors also received warrants to purchase 1,163,000
shares of common stock with a strike price of $2.94 per share.

The current quarter included cash expenditures for non-recurring items such as
MediaSite acquisition costs, large settlement payments on the delinquent
accounts payable assumed from MediaSite and the financing of the restricted cash
escrow. The Company believes it has access

                                       17

<PAGE>

to sufficient resources and operating flexibility to fund operations for at
least the next twelve months.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments

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

Interest Rate Risk

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

Foreign Currency Exchange Rate Risk

All international sales of our software products are denominated in US dollars.
However, the majority of transactions for our media services division in Toronto
are denominated in Canadian dollars. Although these transactions are not
generally subject to significant foreign exchange rate gains and losses, they
are translated into US dollars as part of our consolidated financial statements
and therefore fluctuations in the exchange rate will affect our consolidated
financial statements. The Canadian dollar has been stable relative to the US
dollar and we have not engaged in any foreign currency hedging activities.

                                       18

<PAGE>

PART II  OTHER INFORMATION

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None

(b) None

(c) Between October 1, 2001 and December 31, 2001 the Company issued
    unregistered securities as follows:

    On October 15, 2001, the Company issued 3,780,000 shares of its common stock
    in connection with the purchase of certain assets of MediaSite, Inc. These
    issuances were made in reliance upon the exemption from registration set
    forth in Section 4(2) of the Securities Act, relating to sales by an issuer
    not involving a public offering. A registration statement on Form S-3
    relating to these securities was filed with the Securities and Exchange
    Commission on December 21, 2001.

                                       19


<PAGE>

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits (see exhibit list)

(b) Reports on Form 8-K

    On October 15, 2001, the Company filed a Form 8-K reporting, on Item 2 and 7
    the acquisition (the "Acquisition") by Sonic Foundry Systems Group, Inc.
    (formerly known as MediaSite Acquisition, Inc.) ("SFSG"), a Maryland
    corporation and a wholly-owned subsidiary of the Company, of substantially
    all of the assets, and the assumption of certain liabilities of MediaSite,
    Inc. No financial statements were filed with this report. The Company
    disclosed in this report that it had not determined whether the Acquisition
    should be disclosed under Item 2 or Item 5 of Form 8-K. On December 21,
    2001, the Company filed a Form 8-K/A, on Items 2, 5, and 7, reporting on the
    same Acquisition. The Company reported in this filing that it had determined
    that the acquisition described therein did not involve a "significant"
    amount of assets and thus should not be disclosed under Item 2 of Form 8-K.
    No financial statements were filed with this Amended Report.


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.

                                       20

<PAGE>

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.

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

10.10    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.

10.11    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.

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

10.13    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.

10.14    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.

                                       21

<PAGE>

10.15    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.

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

10.17    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.

10.18    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.

10.19    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.

10.20    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.

10.21    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.

10.22    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.

                                       22

<PAGE>

10.23    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.

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

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

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

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

10.28    Purchase Agreement dated January 25, 2002 by and between Sonic Foundry,
         Inc. and Omicron Partners, L.P., along with the Note, Warrant and
         Registration Rights Agreement, filed as Exhibit Nos. 2.1 to 2.4 to the
         Current Report on Form 8-K dated January 31, 2002 and hereby
         incorporated by reference.

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

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

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


                                       23

<PAGE>

                                   SIGNATURES

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

                               Sonic Foundry, Inc.
                                  (Registrant)

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

February 14, 2002                 By:      /s/ Kenneth A. Minor
                                           --------------------
                                           Kenneth A. Minor
                                           Chief Financial Officer


                                       24